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Stock Options

Owned by Nathan Wailes
Last updated: Nov 10, 2017
6 min read

 

Quora



How should you evaluate a job offer from a startup?
http://www.quora.com/How-should-you-eva ... -a-startup

"What % of the fully diluted number of shares does this stock grant represent?"
Then you want to confirm what they mean by fully diluted. Does that include both common and preferred? Does that include any warrants outstanding? Does that include all option grants outstanding? Does that include any convertible loans?
What is the strike price of my shares? What was the price paid for preferred shares in the most recent round? Have you done a 409a analysis and if yes can I see it?

You might also ask:

How much cash do you have?
What is current burn rate? How will the burn rate change over next 18 months?
When do you expect to do your next fund raising? What kind of dilution will that cause?



They said they can't share the % ownership my options represent. I am concerned..should I be?
http://www.quora.com/Startup-Equity/Hav ... nformation

How much equity should I ask for from an early stage startup in lieu of a normal salary?
http://www.quora.com/How-much-equity-sh ... mal-salary

Is it bad if a startup doesn't want to reveal their shares outstanding to a potential hire (or an employee)?
http://www.quora.com/Equity-Compensatio ... n-employee

How do you deal with a startup CEO who will not disclose total number of shares in the company during the hiring process?
http://www.quora.com/How-do-you-deal-wi ... hael-Wolfe

Should you join a startup if they refuse to disclose the percentage equity ownership you are getting as part of your offer?
http://www.quora.com/Should-you-join-a- ... your-offer



Questions to ask



How does my compensation compare to my peers in the company?
What are my options worth?
What percentage of the company do my options represent on a fully diluted basis?
Can I exercise my unvested options early?
The Company (see Part 2)

How much money do you have in the bank right now? How long will it last?
What was the company’s post-money valuation in the last round?
What are the investor’s preferences?
Who is on the board and whom do they represent?
Would I hire the CEO and board to increase the value of my options?



Every equity offer comes with a vesting period (typically 4 years) and a “cliff” provision that no equity is earned if the employee leaves (or is terminated, and “cliffing” firings at 362-364 days are pretty common).


Below 0.1, on the other hand, I’d say that the employee should write the equity off entirely and focus only on the salary (with an understanding that startups rarely give salary raises or annual bonuses; if the investor-determined valuation goes up, that is the raise).



AngelList
https://angel.co/

Wikipedia - IRS Code Section 409(A)
http://en.wikipedia.org/wiki/Internal_R ... ction_409A



1. How many outstanding shares of stock are there?
2. What is the monthly burn rate?
3. How much cash is in the bank?
4. When will the company achieve positive cash flow?
5. When will the product ship?
6. May I talk to any of the outside investors on the board of directors?
7. May I talk to several beta sites?
8. How much of a “liquidation preference” do the investors have before common shareholders get anything?
9. Are there any intellectual property issues or lawsuits pending?
Part 1:
1. Can you give me the offer in writing?
2. How does my compensation compare to my peers in the company?
3. What are my options worth?
4. What percentage of the company do my options represent on a fully diluted basis?
5. Can I exercise my unvested options early?

Part 2:
6. How much money do you have in the bank right now? How long will it last?
7. What was the company’s post-money valuation in the last round?
8. What are the investor’s preferences?
9. Who is on the board and whom do they represent?
10. Would I hire the CEO and board to increase the value of my options?
Never Sell Common Stock in an Outside Financing

The number one determinant of FMV is always (2) in the above list: what people are willing to pay for it. If/when the IRS chooses to look back at the FMVs you applied to your stock, that will be the first thing they look for. This is precisely why any competent startup lawyer will tell you that, while Common Stock is good for founders and equity incentives for services, you should almost never sell Common Stock in a financing. This will likely “taint” the FMV of your Common Stock, and effectively force you to set a significantly higher FMV for your stock options than you otherwise would have to. For that reason, it’s almost always recommended to do a financing either through preferred stock or convertible notes that will eventually convert into preferred stock. Because preferred stock has various preferences/privileges that Common Stock does not, you can sell preferred stock for, say, $2.00 per share, while still making a credible claim that the Common Stock is worth a fraction of that.

At Formation

So how is it that founders and early employees are able to get millions of shares in their startups for practically nothing, without being taxed? Simple. At formation, the FMV of your startup’s stock is considered virtually nothing. Now, it’s certainly not worth nothing to you. But because you haven’t built an actual Company yet, the IRS accepts the argument that the huge amount of uncertainty and risk of failure make the stock worth fractions of a penny.

We generally issue founder stock at a price per share equivalent to par value (usually $0.0001 per share). So an issuance of 2,000,000 shares to a Founder would require a check for $200.00.Assuming that founder files her 83(b) election (bad news if she doesn’t), she won’t realize taxable gains until she decides to sell her stock.

After Formation, Financing

After formation, and as you move into seed funding, setting the fair market value of your Company’s stock becomes much more complex. Section 409A of the Internal Revenue Code is largely what drives that complexity, which this post is not meant to cover. The nutshell is that before a full venture capital financing, your lawyer will recommend that your Board of Directors use various “illiquid startup” guidelines to set the FMV of your stock. After a VC financing, you’ll likely get a formal 409A valuation from a bank or valuation firm, and use that to set the exercise prices of your options.

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