| > After that, if anything is left, the profits are split
> between sponsors and investors depending on the agreement. This is a complicated topic, probably with no perfect answer. But it's worth considering this: Is the equity granted to employees as a way to incentivise maximising shareholder value, or is it a substitute for regular (cash) compensation? I'd argue that, except for very senior or very early employees, it's the latter. > the employees would still net X - Y per every option they have Thanks! Your calculation is precisely the justification that I said companies may try to use to get you to accept an offer. And it often doesn't make sense. To build on your example: - 1,000,000 preferred shares at $X per share, with 2x liquidation preferences
- 3,000,000 common shares (including employee option pool, and all employees get accelerated vesting on a liquidity event)
- Employee options have a strike price of $Y, where Y=0.7X (a 30% discount to the last round). If the company is sold tomorrow, at a valuation of $X per share, then that's $4X MM. The preferred shareholders get $2X MM (due to their 2x liquidation preference). The 3 MM common shares split the remaining $2X MM. So each common share gets $0.67X. This is less than the strike price. So the options are underwater. I used a 2X liquidation preference to make the math easy. But there can be other provisision (e.g. an IRR ratchet) or situations (e.g. a flat- or down-round) which can cause a similar outcome. Moreover, the naive X-Y valuation of each option doesn't account for (i) the riskiness of the eventual outcome, (ii) how far away that outcome is (time value of money), (iii) lack of liquidity (can't sell the options, for any price). So you can't just take a discount of salary, and eplace the dollar amount with a number of options vesting this year, using that X-Y value per option. |
- Absolutely 1X liquidation preference
- strike price between 0.1X and 0,3X the preferred
- No accelerated vesting :)
- Significant retention plans are given upon liquidation to the the productive engineering team members, regardless of how many options they owned (I personally know folks who made little fortunes even if their options were completely worthless on liquidation day)
That being said I agree with your salary discount thing. I worked in other startups and I had been victim of that, and I'd never take a significant haircut again for some Monopoly money, all it takes is some education.