

Ask HN: Exercise Price For Options At A Startup - scatter

I am considering joining a startup and would appreciate if someone could tell me if I am getting a good deal in terms of stock options.<p>First a bit of back ground: The start up is related to my PhD research area and gives me a chance to build up on my back ground as opposed to a standard industry job. So, I am considering this seriously.<p>The company has 1 million stock outstanding with a stock value of ~60$ per share at a recent valuation. The CEO is the majority stock holder in the company ~60%.<p>I am being offered around 7500 stock options with the strike price at the fair market value (~60$/share). Since the strike price is so high,  it basically makes it impossible for me to exercise the options without selling the stock at the same time (when the stock is vested).<p>Is the strike price for the options normally equal to the current market value or is it usually a discounted price ?<p>Thanks !
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scatter
Thanks for your replies everyone ! One of my concerns was that CEO has been
putting in all the money so far, so the valuation of the company is
questionable.

Only comparison I could make was with another competitor in the same area,
which is valued about twice of this company. So, the valuation doesn't look
too arbitrary.

The good thing is that the CEO has been the CEO of another big company for >10
years. So he is capable of making this company a success. This company has
been around for 5 years and has some physical products out there, so the
chance of it going belly up over a short period is relatively low.

They are offering a salary that slightly exceeds that job current job
including bonus/401K etc. and the vesting period for the options is 3 years
with 1/3rd of the options vesting each year.

The CEO wants to make the company profitable and keep it private if possible.
He said I could sell the options back to the company once they vest. He said
he just converted somebody's options to company's stock once they vested. I am
not sure if I can get real cash for the options though, if the company is
still private and not seeking funding.

The offer letter says vesting period, but it doesn't give details regarding
what happens if the company gets acquired before my options vest.

Is it okay to ask for the options agreement, before joining the company ?

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brudgers
I think this is a case where it's probably best to look at regular
compensation and take stock options out of the evaluation. A high strike price
and a majority owner who wants to keep the company private mean that there is
low likelihood for a significant upside.

After a year you will need to come up with $180,000 to exercise your options.
That's real money for a small ownership stake with no control - i.e. it would
pave a substantial runway with ramen for your own startup. Sure, if the stock
is up above the strike price, you could borrow and then sell for a profit -
but that's likely to be in the annual bonus range (a few thousands) rather
than home run money.

Two additional pieces of advice: make sure that you understand the tax
implications, and be sure to read over any buy/sell agreement carefully.

Good Luck.

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scatter
Thanks brudgers ! Is it okay to ask for the stock option agreement before
joining the company ?

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brudgers
Based on not having done so myself in my younger days, I would absolutely
require it (in regards to a closely held corporation).

It is not uncommon for the stockholder agreement of a closely held company to
require the sale of shares back to the company upon an employee's departure or
to prevent the sale of shares to a person of the employee's choosing.

In particular for your case, the agreement will tell you whether the company
is obligated to loan you money in order that you may exercise your options so
that the stock may be resold back to the company.

The more I have thought about it, the more this looks like a discretionary
bonus not really an investment opportunity. The amount of money entailed to
exercise your options and retain the stock is just too high - these are option
grants which are vesting not stock grants. If at the end of the first year the
company doesn't loan you money to exercise your options, there's no value for
you unless you have $150k in cash handy.

I would add that 7500 shares is going to require a ten billion dollar exit to
give you "fuck you" money (assuming no dilution or liquidity preference).
Again it's probably best to ignore the stock as a form of compensation.

[edit] Any resistance to giving you the stockholder paperwork while you are
considering the offer is, in my opinion, a red flag.

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mchannon
"at a recent valuation"- is that market imposed or internal to the company?
Finding one investor bold enough to put in at a $60 basis is completely
different from publicly trading at a $60 basis.

After the company goes through $XX million of funding, gets closer to its
goal, but the industry and stock market don't value it, you may have
singlehandedly helped it go to $45 instead of $0.01, but you don't make out,
period.

My understanding is that you can sometimes sell the option for fair market
price once it vests (again, publicly traded at that point?), so worrying about
how high the strike price is is the least of your problems with this deal.

These deals often have "vest at the board of directors' discretion", "fire
before vesting" and dilution gotchas that leave you holding the bag (an empty
bag) when it's time to pay you. Keep a close eye on those.

The reason to issue options at market value is to avoid you getting a tax bill
right away (for income you don't get to spend). If you do take the deal, be
sure you file the correct tax form immediately to keep that tax liability
away.

Hopefully this is a great position with great salary, because at $60 this
company's mature enough that without a major breakout and savvy business CEO,
the options are lottery tickets.

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SimianLogic2
Seems normal--whether it's a good deal or not depends on where that valuation
comes from (in-house or pegged to a funding round), where you think the
company will exit, if you think the company will exit, the salary they're
offering, and the salary you could get elsewhere.

If they sell for a penny under $60 million, your options are underwater and
worthless. If they double in value over the next 4 years (assuming standard
vest), that's $450k to you if they sell for $120 million. If they never exit
and you leave the company, you're basically screwed (unless you have $450k
lying around and are certain it will be liquid again later).

You should make a projection of how you think the company's value will change
and weigh that against the salary they're offering. Three-quarters of a
percent sounds pretty generous for a startup that's already valued at $60mm,
unless you're coming in at a pretty senior level, but without knowing where
that valuation comes from it's hard to say for sure.

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mchannon
Since you've mentioned the founder is the source of the $60 valuation, you
need to look at the fundamentals of the company to calculate what those
options are really worth. (who's the other 40%?)

Figure how many $M in earnings the business has now, 1 year, 5 years, and then
multiply that by a P/E ratio, of, say, 20. If you're nowhere near $60M then
the founder is not being honest with you (and unfortunately, probably not
honest with himself either).

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zio99
Usually current market value. It's discounted if it's considered high risk
(and therefore has the possibility to tank).

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zio99
Can you confirm whether you can definitely exercise the sell? Also, what is
the length of the term of vesting? Taking that into consideration; do you see
this company around at that time?

