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Where can I find out if this applies to founder stocks as well? And as a founder what can I do to qualify for this?
by abhinai 9y ago
Where can I find out if this applies to founder stocks as well? And as a founder what can I do to qualify for this?
- rdl 9y agoIt does, generally. (Not legal advice, talk to a lawyer, but it's basically the default when a natural person buys founder shares for a pittance, and a good reason to offer restricted stock rather than options (or at least, to offer early exercise) up to seed and Series A and possibly a little longer.)
- sk5t 9y agoWhat companies are selling Series A shares at "a pittance"? Presuming the money means something to you, would you rather pay $100,000 cash for 1% of a $10MM Series A-ready startup or pay $0 for ISOs?
- URSpider94 9y agoNon-preferred shares often sell at a very deep discount vs. the preferred shares offered to investors. As you get closer to IPO, they have to converge in value at 1:1. This is how startups can grant options that are nominally in the money on grant day.
- jsjohnst 9y ago> This is how startups can grant options that are nominally in the money on grant day. Say what? That has nothing to do with it. Any difference in price is do to when the last 409a was done.
- URSpider94 9y agoSorry, I was being intentionally obtuse. ISO's are options on shares of common stock, which have a completely indeterminate value in most start-ups, because they likely don't exist outside of the company's ISO pool and the founder's stakes, and they never trade. Investors are all buying preferred shares, which carry a liquidation preference, sometimes a multiple of their share price. Any exit below the sum of the outstanding preferences mean that any common stock is worth $0. Companies take advantage of this to file 409a's saying that common stock is worth a fraction of the latest share transaction for preferred stock. I've seen ISO's with a strike price of 30% of the last preferred shares at Series B. Certainly, they are worth less than the preferred shares, but are they worth 70% less? Who can say? But - it's in the best interest of employees to keep that value as low as possible. On the day of an IPO, all preferred shares convert to common stock, at which point the value has to be 1:1. In order for the company's prior 409a's to pass an audit and not get the ISO plan disqualified, the values have to converge smoothly leading up to the IPO. I was being obtuse by pointing out that if you judge the gap between the value of common shares and preferred shares to be smaller than what the 409a dictates, then you are "in the money" on grant day. Also, a lot of start-up employees don't understand nearly as much as I've written above about ISO's (I know, because I was one once), and so it just looks to them as if they were handed free money.
- rdl 9y agoFounder shares and pre-seed are often pre the first valuation and at a nominal corporate valuation of $100 or $1000 total. I've written checks for $30-50 before. A $10mm Series A valuation is likely going to be something like $10k for 1% of the common. $10k is a lot of money, but if I believed in a company enough to take a Series A 1% role I'd probably do $10k. It's better to get in right before a valuation change, of course -- it might have been 6mo since a 409a valued the company at $3mm.
- sulam 9y agoHow are RSUs a good idea here? It seems like they wouldn’t start the 5-yr clock until liquidity.
- rdl 9y agoRestricted Shares (founder shares, etc.) are not RSUs. They are just regular common shares subject to a buyback provision (reverse vesting)