

Ask HN: Are my options worthless now? - throwit

I'm an early employee at a startup. From the go, our money has come from our founders, and from a single external investor.<p>A year into working there, now with ~15 employees, we (most of us) were issued stock options. At this point, we were still in 'stealth mode', with no additional investment than the start.<p>There was a valuation (as I understand it, a number picked from a mix of equations, and pulling things out of the air) of $30MM, at an exercise price of $4.00, for 37,500 shares; for a total of $150,000's-worth, 0.5%<p>Another year later, we're not turning a profit but we've had a few more investors come in over the past 6 months, no new hires.<p>We just got word that those who didn't get granted options last year, were granted them this year (the reason they weren't given them the first time round with everyone else? Personal differences with the CEO).<p>They were issued at an exercise price of $1.00, for 9,000 shares; for a total of $36,000's-worth.<p>This is where my math gets off. I'm assuming the share price has gone down, because of the investment we've had. But, should it really be that much? If today's price is $1 per share, does that mean that (assuming worst-case, the self-valuation hasn't changed) there are now 4x as many shares in total? And hence, my options worth (0.5% / 4)?
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btilly
Short answer, the $4 options aren't likely to pay off. The $1 options might or
might not, but in terms of your personal financial planning you should assume
they are worth nothing as well.

Read on for the long answer.

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Let's start with the facts.

First of all your options are contracts obligating someone to sell you stock
at a fixed price should you choose. If the stock costs more than that, then
your options can be used to make you a profit. If the stock costs less than
that, then it makes no sense to exercise your options. If you have 9000 shares
at an exercise price of $1.00, then thats not worth $9000, that's an
opportunity for you to SPEND $9000 and get something that might or might not
be worth more. (Note, there are tax consequences to handing out options at a
price different from the valuation of the company, so at the point they are
issued the return you can get from exercising them is usually $0.)

Secondly a company is worth today what someone is willing to pay for it. No
more, no less. All of the possible potential growth, and future revenue? They
only matter in so far as they convince someone that it is worth spending money
on. Tomorrow may be a different story, but today it is only worth what you can
find a buyer for it.

Thirdly, early stage companies are highly illiquid. Meaning that there is no
real market for them, and different people will assign wildly different
valuations. Also those valuations can change, fast, as facts change. (Where
facts may be as simple as, "there is a different person willing to invest".) A
4x fluctuation is very, very easy to believe. A 4x fluctuation down with new
investors tells me that the company could possibly succeed (else where would
you find investors?) but the prospects are nowhere near as bright as the
company previously thought.

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Now what do these facts mean for you, or any employee?

First, options are not worth the strike price. $150k is not the worth of the
options you got in the first round. That is the amount you are allowed to
spend at that price for stock that might or might not be worth more.
(Hopefully will be worth more.)

Second, as an employee you like low strike prices. The lower it is, the easier
it is to be worth a lot later.

Third, options for the future could always wind up worth something, but that
is not guaranteed. Your $4 options are only going to be worth something if the
company grows to the point where it will be worth a lot. Even if the company
is worth less now, it is possible for it to be worth more later. Nobody knows
whether that will happen, and your guess is likely to be better informed than
mine.

Fourth, the high valuation on your initial options suggests that this is the
value that the initial external investor thought it deserved, and maybe
invested at. The current valuation is likely to be based on what current
investors think it is valued at, and likely that reflects what value their
investments were made on the basis of. That means that the initial external
investor really believed in the company, and has likely lost a lot of money on
paper so far. (But could still make it back if the company succeeds.) As
upsetting as this may be for you, it is unlikely that anyone was intentionally
trying to cheat you.

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bobfirestone
In options there are two important numbers the current stock price and the
strike price. Assuming the stock price is higher than the strike price the
option is worth the difference between the two.

I am a little unclear about the "$36,000's-worth". I assume that that is the
face value of the 9,000 shares. So if $36k is the value of the underlying
stock than the share price is $4. The same $4 a share that the stock was worth
when your options were issued.

The new options were issued for $1 a share with a $4 stock price. Assuming
that there was a buyer for the shares at the current price of $4 the options
could be exercised today and be worth $27k.

$4 - $1 = $3 per share profit X 9,000 shares = $27,000.

Some valuation examples

Price Theirs Yours $4 $27k $0 $5 $36k $37.5k $6 $45k $75k $7 $54k $112.5k $10
$81k $225k

What the options are worth today is really a minor concern. You control
substantially more shares than the people who have just been issued options.
If the company succeeds you all walk away with a bunch of money. If it
doesn't, well none of you are going to make anything from your options.

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bobfirestone
The table lost its formatting

Price Theirs Yours

$4 $27k $0

$5 $36k $37.5k

$6 $45k $75k

$7 $54k $112.5k

$10 $81k $225k

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fringedgentian
What they are probably doing is multiplying everyone's options, including
yours, by 4 and reducing the value of each one to 1/4 the original. Then
everyone still owns the same % of the company but it is easier for the finance
people work with them.

So your # of options is probably changed just like everyone's, but they don't
bother letting you know usually unless it is time for you to sell them. If you
get the opportunity to sell, they will let you know your actual number of
stock and what each can be sold for. That's what happened to me anyway.

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nayefc
Cut the math for now, on what basis are you valued at $30 million? You said it
yourself, out of thin air.

If you are not making profit, still in stealth-mode and have no clients, sorry
to break it to you but it's worth...: $0.

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salahxanadu
They were never worth anything.

