4 ms·

Non-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

Non-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 ago
  Sorry, 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.

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 ago
Sorry, 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.