
Understanding startup equity basics (for job seekers) - clamorcod
https://underdog.io/blog/startup-equity-basics-for-job-seekers
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mv1
An important point that the article doesn't discuss is understanding the
possible value of your options if the company actually exits.

There are few factors here - what percentage of the company's total share
count do your options (vested and unvested) represent. How big of a liquidity
preference are you sitting behind. What are the odds the company clears this
liquidity preference. What is the likely valuation of any successful exit
(i.e., one the clears the liquidity preference, and in the case of options,
clears the strike price of the options issued). What are the odds of such an
exit. And finally, what are the change of control terms.

In terms of what fraction of the company do your options represent, you'll
have to ask how many shares are outstanding and then make a guess as to how
many more will get issued between now and success. Remember, each financing
results in lots more shares being issued.

What is the liquidity preferences your options sit behind. Usually options
convert to common, so that means you are the lowest person on the totem pole.
If the company has raised $100MM, there is very likely at least a $100MM
preference. That means that if the company exits for $90MM the common
shareholders (that's the employee option holders) will get nothing.

In terms of valuations, you can figure out what your options are worth at
various exits above the liquidity preference, but only if you know the terms
of later financing rounds. Generally, I'd recommend exercising at least 1
share of options as soon as possible so that you have shareholder information
rights which should tell you what these terms are so you can calculate the
option value.

More importantly, what are the odds of such exit. Generally, a company has
more options to exit for $100MM than it does for $1B than it does for $10B. Of
course, if the company is wildly successful, the higher the odds of a bigger
outcome. The question is, what threshold of success is needed for the options
to have enough value.

Finally, you should consider the change of control terms. If a company is
acquired, do your shares vest immediately, or are they converted to shares of
the acquiring company? What happens if the acquirer fires you? If you are
early enough you might be able to negotiate for better change of control
provisions. You want to avoid a scenario where the company has a successful
exit and the acquirer is not incentivized to keep all the employees that have
meaningful option stakes. This is usually less a problem in software developer
roles, and more of an issue for sales and executive staff (CFO, CSO, etc.) but
it doesn't hurt to have better terms.

In any case, employee stock options are complicated, and often the terms
matter more than the price. There is a quote, can't remember who said it, "You
name the price, I name the terms."

~~~
clamorcod
All totally good points. I can make this even more complicated!

>If the company has raised $100MM, there is very likely at least a $100MM
preference. That means that if the company exits for $90MM the common
shareholders (that's the employee option holders) will get nothing.

In this case, won't blocking rights prevent that exit in most cases? Investors
with liquidation preference might not want an exit that comes in lower than
their cost basis...

~~~
mv1
Maybe. Investors can give up on a company and want to get their money out
which would result in this kind of sale. More likely, as you said, the company
will be forced to go for bust given the current climate.

It is also possible for investors to block an exit that can be great for
founders and employees. For a $1B fund, a $150MM exit on $10MM raised doesn't
move the needle, but it could be life changing for the founders and early
employees. Good investors will care about this and try to figure something
out. Others might just block the transaction.

