

Ask HN: Should I be told a startup's present valuation when given stock options? - quickpost

I was recently given a set of stock options that vest over the next 4 years as part of my compensation working for a startup.  Since the founders didn't tell me either the present valuation of the company or the # of outstanding shares, I feel like I have no way to effectively determine if these stock options will be worth anything, ever.&#60;p&#62;The only information I have is the strike price, which doesn't tell me a whole lot. Is this common practice in startups with less than 20 employees?  What are you experiences?
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tptacek
This question comes up all the time here. There's a very simple answer: Yes.
If equity is a significant part of your compensation, you need to be informed
of how to value it.

Here are all the caveats and wrinkles I can think of:

* Ownership percentages are deceptive. If you're an employee (meaning: you start with a steady salary), 1% is a big number. With 19 employees preceding you, you're probably not getting 1%. After funding, the founders may be only high single digits themselves.

* 90% of 0 is 0. You need to be asking questions about how equity might become worth something. This isn't as hard a conversation as you may think it is. Startups often sell for rule-of-thumb multiples of revenue. Ask: two years from now, what's the top line revenue of the company going to be? Will the market value the company at 2x that revenue (a consulting company multiple), 4x (a product company), or 8x (a product in a red-hot market)? Take all the numbers you get and work back what the company is saying you might make if the company gets bought, and then scale it by the likelihood that any private company gets bought favorably. Otherwise, all the "percentage" you get is is a point score for your ego.

* ( _most importantly_ ) Even if you know what the shares are worth today, you don't in fact know anything about what they're worth by the time they become liquid. That's because every single financing event in the company will reallocate ownership. Every round of funding is going to impact them. In extreme but not (unfortunately) rare cases, your shares can be worth nothing even in a tens-of-millions-of-dollars acquisition --- this goes double if you leave the company before the liquidity event. A company with a stock plan and 20 employees has spent a lot of money on legal to ensure that you have no rights.

I just got back from a huge industry convention in San Francisco, and after
talking to a lot of friends there, I've come to this conclusion: tech people
are _unbelievably_ awful negotiators. Let me make a suggestion. Do what you'd
do if you were buying a car. Negotiate the value of the transaction in an
objective currency: dollars. Then, when the company tries to "finance" the
deal in shares, you at least know the dollar value _they're_ trying to assign
to the shares.

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nazgulnarsil
_After funding, the founders may be only high single digits themselves._

wow, this is normal? I guess when you're playing flip-lottery you don't care.

~~~
pg
Fred Wilson's post on this is the best source:
[http://www.avc.com/a_vc/2009/02/founder-dilution-how-much-
is...](http://www.avc.com/a_vc/2009/02/founder-dilution-how-much-is-
normal.html)

If by "flip" you mean sell the company quickly, it would actually be a
different story. VCs wouldn't fund you if that was what you wanted to do, so
if you raised money it would be a smaller amount, from angels, and there would
be much less dilution.

~~~
netcan
The post suggests 20%/25%/60% for founders/management team/investors is a
_typical_ outcome. I assume that employees take their share from the 25%
management and that it typically isn't very big.

It would be interesting to know what an average employee stock option at a
start-up is ultimately worth discounted to the time when it's earned.

~~~
pg
That kind of split is what you'd get if a company became really big. So it's
more an ideal outcome than a typical one.

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pg
Anyone getting stock from a startup should know what percentage of the (fully
diluted) company it is.

~~~
quickpost
That's exactly the response I was looking for - Thanks!

~~~
borism
Yes, but how to ask that kind of thing politely?

I would imagine it's pretty rude to ask "so how many percent of your company
are you giving me?" at your first interview, no?

~~~
tptacek
There is absolutely nothing impolite about asking this question. You don't
need to be delicate. It's morally equivalent to asking whether your salary is
denominated CDN or USD.

~~~
bps4484
that's a great analogy. If the person giving you the offer acts offended you
ask such a question, you may want to question working there. Being able to
discuss compensation openly is (in my opinion) extremely important for any
job.

~~~
borism
I don't think it is great analogy. You're comparing fiat money to illiquid
hard-to-value startup shares that have a high probability of being worth 0 in
relatively short term.

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chrisbennet
If they expect you to work harder because you have equity, then yes, you
definately have a right to know what you are getting in return for your extra
work.

In reality: (A) The chances of your company ever having a "liquidity event"
are slim. (B) Even if it did, your share of the windfall would probably be
less (per hour of overtime) than if you just worked at a "normal" job.

If you accept the above, what your equity is worth becomes somewhat
irrelevant. You better be doing it because you love the work.

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tyrelb
You should know at minimum the current value of the shares (i.e. last funding
round price) and the number of shares + options outstanding.

Options are also horrible - unless you have some agreement which allows you to
exercise them upon a liquidity event (i.e. buy-out, IPO). Get shares vs.
options when given a chance.

~~~
portman
In the US, if you are given shares of a company when you join, you must pay
taxes on those shares.

Let's say the startup is currently valued at $5M, and you are given shares for
1%. You need to write a check to the IRS for your share of $50,000 in income.

Alternatively, if you are give the equivalent number of options, you do not
have any tax liability until you exercise those options.

This is one reason (of many reasons) why it is almost unheard of for a startup
to grant employees shares instead of options.

~~~
tptacek
Restricted stock is common in startups (there are company structures that may
require it). Vesting structure and 83(b) elections also matter. Expecting
'grellas to offer a much more coherent explanation momentarily.

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johnrob
Equally important is the reverse question: if a prospective employee doesn't
demand this information, should I hire him?

~~~
tsuraan
You would honestly rate a programmer based on his knowledge of business
finances? That seems more than a little mad.

~~~
johnrob
It just seems incredibly irrational to accept not knowing very important
details. In reality, I'm sure many smart people ignore these details. It
amazes me that they accept "you can have a piece of the pie" without asking
"how much of the pie?".

~~~
tsuraan
I guess that's a valid point of view. For me, I have an interesting job with
some hypothetical equity. I don't know its supposed value, and quite possibly
never will. It's not something I stress about, but if it someday becomes
valuable, it will be an unexpected surprise. I'd hate to think of not getting
a job based off that point of view :) Of course, I've always seen stocks as a
funny form of gambling, so that might skew my views a bit.

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krav
If they won't give you this information, ask yourself if these are the type of
founders you want to work with?

~~~
tptacek
They might be. You don't need a license in startupology to start a good
company. Some people think (erroneously) that it's bad to have people talking
about company numbers. Conversely, there are some m-teams that are extremely
"open" about numbers and valuations that will, in the end, totally screw over
everyone on the team. When it comes to startup equity, let me say it again:
_you have no rights_. The exceptions to that bald assertion tend to prove the
rule.

Are you doing what you love? Do you like the people you work for? Is the
company thriving? Each of those questions is probably more important to your
outcome than your "percentage".

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bfung
Repost of a link that was on HN before that answers this question. I liked it
so much that I bookmarked the submission.
<http://www.payne.org/index.php/Startup_Equity_For_Employees>

