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Curious side question. Does anyone know what (if anything) generally happens to employee stock options in the event of these large funding rounds. Most options

by netcan 10y ago

Curious side question. Does anyone know what (if anything) generally happens to employee stock options in the event of these large funding rounds. Most options schemes are effectively designed around the idea of "liquidity event" which used to mean IPO in successful cases. These days when we see large investment rounds and acquisitions replacing a lot of what IPOs used to do, where does that leave options holders? I suppose this question also applies to early investors and founders too.

silasdavis 10y ago
The company I used to work for provided liquidity moments around at least one funding round
ChuckMcM 10y ago
Generally nothing, which is to say that the value of the company is higher so the options are "worth" more, but since there is still no way to sell them you cannot capture any of that value. It also makes it more expensive to exercise the options for employees as AMT will be assessed on the difference between the strike price (what the options cost to exercise) and their new higher "value".
iblaine 10y ago
Nothing. $181M at $1.5B sounds pretty good to me. But in reality the employees are no richer today than they were yesterday. If everything goes right and the stars align, in several years there will be a liquidity event for investors, then founders/execs, then employees.
- the_watcher 10y ago
  This isn't always the case. In many cases, part of the large, later stage rounds can offer options holders a chance to cash out (at least somewhat).
- SeoxyS 10y ago
  Unity is getting to the stage where early employees can start cashing out through secondaries. Marketplaces like Equidate[1] can help with that. [1]: https://equidateinc.com/ https://equidateinc.com/ - disclosure: I'm an investor in Equidate, and they're my favorite. There's a few others in the space like SharesPost, EquityZen, etc.
chrdlu 10y ago
There will be a new 409a value following the round. The 409a value is the price of common shares that an independent valuation firm determines. An increasing 409a means that future stock options will have a higher strike price. For existing option holders who have options but haven't exercised, a rising 409a means a larger tax bill. If the option holder decides to exercise, they will have to pay tax on the spread between the strike price and the 409a value at the time of exercise. This can be painful if the 409a value jumps significantly. There are a few companies like Uber, Airbnb, etc where the price jumped so much that many employees were stuck with massive tax bills. If you find yourself in a similar situation, some funds like the ESOFund can help cover the up front cost and allow you to keep future upside.
- ryanSrich 10y ago
  Wouldn't you just sell your stock immediately and use that cash to pay the tax? Perhaps I'm missing something.
  - smeyer 10y ago
    I think you're missing that the stock might not be liquid. If you're an employee at a pre-IPO startup, you might not be able to just exercise your options and immediately sell some of the stock (since there's no public market and you may be restricted from various private sales). But you may still want to exercise the options (because you're leaving the company, you're worried about a larger tax bill down the road, etc.)
  - chrdlu 10y ago
    As smeyer pointed out, for most startups, employees are not allowed to sell/transfer the shares. Startups like to keep the cap table locked down and have no incentive to allow their employees sell. Sometimes, the company will allow a new investor to buy a % of the common shares from employees (usually when the company does not want additional dilution). For the average startup (ones that are not as well known as Uber, Unity, etc), there is little to no secondary market.
- twright0 10y ago
epa 10y ago
It generally will impact only new employees coming into the company. Their options become more expensive to obtain, and therefore will be less profitable in the future if an IPO occurs, compared to existing employee equity options. Sometimes you see share buy backs in these rounds, but typically only for the founders.

by netcan 10y ago

silasdavis 10y ago

The company I used to work for provided liquidity moments around at least one funding round

ChuckMcM 10y ago

Generally nothing, which is to say that the value of the company is higher so the options are "worth" more, but since there is still no way to sell them you cannot capture any of that value. It also makes it more expensive to exercise the options for employees as AMT will be assessed on the difference between the strike price (what the options cost to exercise) and their new higher "value".

iblaine 10y ago

Nothing. $181M at $1.5B sounds pretty good to me. But in reality the employees are no richer today than they were yesterday. If everything goes right and the stars align, in several years there will be a liquidity event for investors, then founders/execs, then employees.

the_watcher 10y ago
This isn't always the case. In many cases, part of the large, later stage rounds can offer options holders a chance to cash out (at least somewhat).
SeoxyS 10y ago
Unity is getting to the stage where early employees can start cashing out through secondaries. Marketplaces like Equidate[1] can help with that. [1]: https://equidateinc.com/ https://equidateinc.com/ - disclosure: I'm an investor in Equidate, and they're my favorite. There's a few others in the space like SharesPost, EquityZen, etc.

chrdlu 10y ago

There will be a new 409a value following the round. The 409a value is the price of common shares that an independent valuation firm determines. An increasing 409a means that future stock options will have a higher strike price. For existing option holders who have options but haven't exercised, a rising 409a means a larger tax bill. If the option holder decides to exercise, they will have to pay tax on the spread between the strike price and the 409a value at the time of exercise. This can be painful if the 409a value jumps significantly. There are a few companies like Uber, Airbnb, etc where the price jumped so much that many employees were stuck with massive tax bills. If you find yourself in a similar situation, some funds like the ESOFund can help cover the up front cost and allow you to keep future upside.

ryanSrich 10y ago
Wouldn't you just sell your stock immediately and use that cash to pay the tax? Perhaps I'm missing something.
- smeyer 10y ago
  I think you're missing that the stock might not be liquid. If you're an employee at a pre-IPO startup, you might not be able to just exercise your options and immediately sell some of the stock (since there's no public market and you may be restricted from various private sales). But you may still want to exercise the options (because you're leaving the company, you're worried about a larger tax bill down the road, etc.)
- chrdlu 10y ago
  As smeyer pointed out, for most startups, employees are not allowed to sell/transfer the shares. Startups like to keep the cap table locked down and have no incentive to allow their employees sell. Sometimes, the company will allow a new investor to buy a % of the common shares from employees (usually when the company does not want additional dilution). For the average startup (ones that are not as well known as Uber, Unity, etc), there is little to no secondary market.
twright0 10y ago

epa 10y ago

It generally will impact only new employees coming into the company. Their options become more expensive to obtain, and therefore will be less profitable in the future if an IPO occurs, compared to existing employee equity options. Sometimes you see share buy backs in these rounds, but typically only for the founders.