Ask HN: How do I gauge the value of stock options that I have been offered?

[throwaway_9989]

Throwaway for obvious reason.

I've been working at the current startup for a little more than 4 years and was offered total around 400,000 options. It requires another 4 years to fully vest those 400k options.

We raised totally about $10M and have about 55M shares outstanding. Our current 409A value is $0.07. The company is going to raise series A in the next 15 months.

My cash comp is around $60k. I have another offer at $120k.

Should I stay at current company for options in the next 4 years or should I join the new one (pure cash, no options)?

What questions should I ask the founders to be able to gauge these?

[fdgsdfogijq]

General rule of thumb for any early stage startup, is if you are not a founder, or C level employee getting multiple single digit equity percentages, use this equation:

$VALUE_OF_EQUITY_GRANT * 0 = 0$

seriously. value it at 0

[DamnYuppie]

This 1000! Take more cash always!

[pg_1234]

ALWAYS take 2 * the cash!

[chris11]

There's guides out for evaluating startup equity. Here's a couple. https://www.holloway.com/g/equity-compensation https://manual.withcompound.com/manual-company-equity/unders...

I don't agree you should assume equity as worthless. Especially for larger vc funded startups. But equity can get complicated, and it's possible for a company to have an exit and for you to lose money. But the majority of early stage start ups will fail.

Though the $120k offer seems much better. Could you negotiate equity or improve salary? 100k*.07 means they are giving you the option to buy 7k worth of equity a year. You are giving up 60k a year in lost salary to do that. So your equity would need to about 10x before you make up the lost salary.

[lacker]

Here is an optimistic way to calculate. If there are 55M shares outstanding, then 400,000 options represents about 0.7% of the company. You need to make your own estimate for how much the company is worth right now. If the company raised around $10M total, then knowing nothing else, a reasonable guess is that the company is worth about $40M total. That would make the underlying stock of your options worth about $280k, you can subtract the cost to exercise, maybe it ends up being a bit lower like $240k. It's over four years, so that's roughly $60k a year.

So, even in the optimistic case, your option package isn't that great. Your company is offering a pretty low cash comp, and unsurprisingly, they're also offering a low option comp. A good company would offer more to someone even with zero years of experience (assuming you're a software engineer). And this is an optimistic evaluation where you really believe in the startup. Your comp is low, ask for a bigger raise or just switch jobs unless you really like it there.

[gruez]

>You need to make your own estimate for how much the company is worth right now. If the company raised around $10M total, then knowing nothing else, a reasonable guess is that the company is worth about $40M total. That would make the underlying stock of your options worth about $280k, you can subtract the cost to exercise, maybe it ends up being a bit lower like $240k.

If those options are ISOs, then their exercise price is almost certainly going to be equal to the 409A valuation, which means they're worth $0 upfront[1] and gain value as the company grows more valuable. Since you only make money if the company's value goes up, it's almost impossible to accurately assign a value to it.

[1] I use "worth" loosely here. More accurately they have intrinsic value of $0 upfront (maybe a bit more because the company has grown since the last 409A), and some hard-to-determine time value. see: https://en.wikipedia.org/wiki/Option_(finance)#Basic_decompo...

[lacker]

* their exercise price is almost certainly going to be equal to the 409A valuation, which means they're worth $0 upfront*

I don't think this is generally the case; typically the 409A valuation is using accounting rules that are different from how you would personally judge the value of the stock, and the founders are trying to minimize the 409A valuation, so typically 409A valuations are much lower than people would buy the stock from you if there were a market for it. But you have to make your own judgment of how much you think the stock is worth.

But essentially, my point is that even with quite optimistic assumptions, the OP is not getting a good deal, and I think we clearly agree on that, it's just a question of "how bad" a deal the OP is getting.

[rkk3]

> Here is an optimistic way to calculate.

No its a harmfully naive analysis, your "calculations" put the common shares at 10x their stated FMV.

[nostrademons]

Something's screwy about that 409A, it puts the valuation of the company at $3.85M on $10M in invested capital, i.e. the company is worth about 1/3 what investors have put into it. Would be consistent with a down round and failing company, though.

I'd run. If the numbers there are correct, neither management nor investors really have any confidence in the company. As an employee you shouldn't either, particularly for that far under market in cash comp, and if somebody is willing to double your cash compensation, take it.

[rkk3]

> Something's screwy about that 409A, it puts the valuation of the company at $3.85M on $10M in invested capital

That is not the valuation of the company, not all shares outstanding are common, some are preferred which are going to have a substantially higher FMV for an early stage.

I don't know what a "normal" multiple/mark-up preferred would normally have at this stage, obviously it varies on terms. 55M shares outstanding this early would not be the sign of a "healthy" cap table unless they didn't start with the standard 10M outstanding.

[throwaway_9989]

The preferred price is about $0.9 (I heard it's been like this for the last 2 rounds). Does that mean the current valuation of the company is $49M?

The parent comment is also correct. We've experienced a down round due to the pandemic.

[comp_throw7]

If the company's gone through a down round, it's very likely they took funding on unfavorable terms (i.e. worse than 1x liquidation preference), which makes it that much less likely your (non-preferred) equity would ever be worth anything. Take the cash offer (though, if you're in the US and have 4 years of experience, $120k is a bit of a joke too; you should be able to do substantially better even limiting yourself to full-remote companies).

[rkk3]

> Does that mean the current valuation of the company is $49M?

No.

[dlsa]

Explorative notes because this provoked some thoughts and opinions of my own.

1) Value them like a lottery ticket. Now what? They are worth nothing or something. You won't know until they are actually drawn in 4 years. Waiting is fun, right? You're happy to wait for your bonus?

2) Do you enjoy working there? Right now they are chains binding you to the business. Is that an issue? If you get bored and it becomes just a pay check, can you start a suitable side hustle so you stay awake?

3) They're worth nothing at all. The business goes bust in two years. What opportunity cost did you pay? What other actual paying positions did you pass up?

4) Is the business sane enough to last another 5 years? 6 years? Other than your salary, would you actually invest in the business if you could on the market? Are its fundamentals valid? Does it actually produce cash flow? It seems like it is progressing. You worm for them. Are they progressing in your perception? Could you convince me to invest? What would you say?

[ttymck]

Your current employer is giving you an effective 8 year vesting schedule, no one would JOIN a company on those terms. Alternatively, you can look at it like they don't value your first 4 years of contributions at all towards to the value of the company.

Echoing the $0 valuation comment, which you should heed: $60k guaranteed per year is astronomically difficult to match with illiquid equity. You need only search for "equity" here on HN to read the multitude of warnings against overvaluing (read: valuing at all) your equity.

[byoung2]

Your cash comp is low...they can't pay market rate after 4 years? The options are probably worthless, go for the salary at a new place. You missed out on $60k x 4 years.

[crate_barre]

Where is OP located? If it’s a tech hub on the coasts then they fucked him lol.

The fact that you stayed for four years at 60k means they probably think even less of him by now.

For what it’s worth OP, some startup swore they were going public about 8 years ago to me at a billion dollar valuation. It came with a six figure salary and options, this was 8 years ago. Long story short, the company never went public and certainly isn’t valued at a billion dollars by any measure. But they are still around.

[throwaway_9989]

I should've mentioned that I work remotely from a developing country. So $60k is not really a bad deal here. But thanks to the pandemic and the remote work movement, I was able to get a $120k gig.

[robocat]

I suspect you should take the $120k because that will diversify your risk. Also over the next four years you can bank $$$ in your country risk free, and you get on the salary ladder for a future better job (you often only get paid a bit more than your last job). You already have vested options, so you already have exposure to the upside if your current company wins. The actual likelihood of a future win is low, so value extra options at a low amount.

Make sure you understand preferential shares (VCs get paid first, so company needs a big win for you to get anything), and understand how much you are likely to be diluted over time. Also make sure you understand the benefit of cash now to invest in a home or in funds. My equity is locked up and it truely truely sucks.

The other thing to do is ask for $120k, plus options on top of that. You can’t lose by asking if you have another job lined up. But be prepared to walk, and don’t threaten them with your other job, as I have read multiple times that isn’t a good idea (read advice from clued up people, not me).

Two articles to help you think about it like a VC:

https://avc.com/2021/11/seed-rounds-at-100mm-post-money/

https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

[holonomically]

If you don't believe the company will be successful then you're admitting the options are worthless. The whole point of stock options is to align incentives but if you don't think the company will be successful then it doesn't matter how you crunch the numbers. You might as well go get a job with a high salary.

[rkk3]

$0.07 is the FMV for the Common, which of course is not liquid and you don't know what preferences the Preferred Shares have, so its really worth some amount less than $0.07... so less than 28k.

> We raised totally about $10M > My cash comp is around $60k.

Why are they only paying you 60k if they have 10M in the bank? Get a raise.

[exolymph]

Don't. Options are a lottery ticket, and if this were a hot startup they'd be paying you $100k+ in addition to those options. Get out.

For perspective, I make more than you (in cash) as a community manager / content-marketing person at a pre-A startup.

[throwaway_9989]

Thanks for your advice. Like I mentioned in other comment, I'm working remotely from another country where $60k is considered decent. Personally, that is more than enough for me to live a decent lifestyle and thus I'm a bit more risk tolerance.

[pontifk8r]

Seems like you should have been fully vested from any original grants by now. So, 8 year vesting, plus the low salary? Hope you are learning things that will position you for success in your next role.

[dudul]

The 400k may be 2 different grant. One when they joined the company that is now fully vested, and a new one that just started for another 4year vesting.

At least I really hope that's the case, because an 8 year vesting schedule is idiotic.

[throwaway_9989]

You're correct. There were multiple grants, not exactly 2. The vesting schedule is standard and there is nothing abnormal about it.

[webmaven]

> You're correct. There were multiple grants, not exactly 2. The vesting schedule is standard and there is nothing abnormal about it.

So, can we assume some portion of the options was granted more than a year ago, and has vested already?

Your compensation is quite low, I would suggest negotiating now for a higher (market rate) salary and them making you whole after their next raise.

This whole situation has tax implications that could turn out badly for you in some scenarios, so you may need the money from that extra income to deal with that.

[winrid]

I joined a startup with a multi billion dollar evaluation.

Went public, stock tanked. I'll be lucky if I make 100k off those shares, which isn't terrible, but point is anything could happen.

Do you think your startup will make hundreds of millions in a few years? It'll take them 6-12 months after that milestone to actually go public, too.

[artfulhippo]

Controversial take: as an insider, you are in a strong position to determine the value of the options. Is your company under- or overvalued? Is your product better or worse than people think? Is the company culture and morale greater or lesser than average? Are you excited to get up in the morning or do you dread each moment of work? Do you care about the content of your work, the field that your in, solving your customers problems, or are you interested only in your own engineering problems? Are business decisions made primarily by ego, the boss's gut, office politics, or do good data and clear explanations win arguments regardless of who makes them?

Startups are high risk, especially if you have all your eggs in 1 basket. Whether it's reasonable to take the risk depends on data points that only you can ascertain.

The hard part is being honest with yourself. If you've invested 4 years into this job, you surely have emotional attachments to it that transcend economics. Feelings of loyalty are good and normal. One key question to ask is how much loyalty do the founders feel to you? Would it be hard for them to replace you? Do they treat you with respect and camaraderie or like a machine that produces algorithms? Are they competent, inspiring people that you learn from, or "idea guys" who are good at pitching but not much else? If you were the CEO, would you hire them?

Just a few of the questions I would ask myself in your shoes.

[TimTheTinker]

Fully agreed. Posts saying they're "worth $0" are most likely to be accurate if you take the average early-stage startup (most fail).

But as an insider, you have the ability to uniquely gauge whether this is an "average" startup, or one where truly thoughtful, innovative, honest, humble people are working hard for a dream that, from your vantage point, has a good chance of panning out, even modestly.

I will say that your $60k compensation isn't a good sign, though. It signals that the engineers they've hired either (1) are great engineers and they really, really believe in the future of the company, or (2) aren't that great. You can probably gauge which is the case for yourself, but across all low-paying startups, (1) would be a very rare case, and (2) would be far more likely.

[fragmede]

Problem is, all of those can be true, and the startup still fails to find market fit, or traction, or pivot exactly right. Or something happens 3 years down the line that results in the company failing for no internally foreseeable reason.

The road to hell is paved with good intentions, as they say, but that road is build with some really solid engineering (it being so hot there and all), and we only really hear about the successful exits which reeks of survivor bias. The well run companies just fade away in our collective consciousness. I can name Uber and Lyft off the top of my head, no problem, but their defunct competitors? I'd have to look them up to name more than... Flywheel, I think it was?

[dudul]

Take the other offer. We're talking twice your current base vs imaginary money.

[wly_cdgr]

Everyone is saying $60k is low but OP never said where they are. $60k could be quite good depending on location

[tyingq]

He's saying 409A, which means a US company, and saying he has an offer for $120k. So, even if he's in a country where $60k is okay-ish, it's low.

[throwaway_9989]

You're right. The startup is a US company. The parent is also correct, I'm working remotely from another country, where $60k is considered decent.

[crate_barre]

If you are in another country, 120k should be life changing then.

[wly_cdgr]

Ah, didn't know about 409A. Thanks for explaining

[alexpetralia]

Leave yesterday.

[vb6sp6]

Zero dollars