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> How often is the strike price the fair market value of the employee equity pool? Always. If by FMV you mean 409(A) valuation. If you mean something else, th

> How often is the strike price the fair market value of the employee equity pool? Always. If by FMV you mean 409(A) valuation. If you mean something else, the answer is 'never' because for privately held companies we don't know the "fair market value". Your point about VCs seems irrelevant, because the valuation they hold shares at is not that of the "employee equity pool". To take home a strike price equivalent per option requires only 2x (to cover taxes) increase over your strike price, and for the equity to be tradeable. This is not a simple calculation, as implied by your 3X/6X multiple. If you only took home a strike price equivalent per option, you'd never, ever, ever take one of these jobs. Options are priced at 409(A) and for the type/stage of company we're talking about here, are typically 2%-10% of the preferred price. IOW, incredibly low-valued. I don't think you're wrong. I think your comment is malformed.

lumost 6y ago
That's completely fair. Does this math change depending on the exit though? e.g. When the company IPOs or is bought out, the preference pool and the employee pool has to be merged. The implication of your comment is that the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above. On the other hand, subsequent rounds increase the number of outstanding preference shares and your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent). On a 10-year liquidity horizon, the employee option pool can be pushed into the underwater state by subsequent issuance of preferenced shares. In my Experience, this effect explains how startup employees who have stayed with a firm from 10 million dollar valuations to Billion+ valuations do not get anything better than a down payment for their trouble, and a 3x increase in a publicly traded companies stock can easily push an engineer's RSUs to 1.5x+ their salary per year.
- jiveturkey 6y ago
  Thanks for the followup, much more well formed. To a few specific points: > the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above. Yes. This is all but required by "the rules". > subsequent rounds increase the number of outstanding preference shares Yes, but by lesser and lesser amounts of dilution, and at higher and higher valuations. Ignoring down rounds, which are much more common than up rounds. But here I think we are talking about a "successful" exit, which as rare as they are, in the majority still leave option holders high and dry anyway. > your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent). True, however in these cases almost everyone (actually everyone, AFAIK) receives RSUs, not options. RSUs have an actual, current value, and do not require any appreciation in price at all. In fact, a loss in price is still valuable to the holder. You can't go underwater with RSUs. (And you can't face uncertain taxes; be forced to make awful decisions; etc.) > On a 10-year liquidity horizon, This is the real problem with equity compensation today. We've outgrown the system under which options were a great incentive. Golden handcuffs, that most exceedingly often, turn into fool's gold. Honestly, it's time for YC to insist on 10 year termination-exercise rights. The appeal of ISOs is still there for early stage companies, but AIUI one can convert from ISOs to NQ's after the 90 day legal requirement, without penalty. win-win. With a 10 year rights, companies are forced to offer sufficient refreshers to keep staff. This is completely fair and will push companies to earlier exits. On the employee side, people need to insist on it as well ... I don't see it happening because it destroys the VC business model.

lumost 6y ago

That's completely fair. Does this math change depending on the exit though? e.g. When the company IPOs or is bought out, the preference pool and the employee pool has to be merged. The implication of your comment is that the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above. On the other hand, subsequent rounds increase the number of outstanding preference shares and your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent). On a 10-year liquidity horizon, the employee option pool can be pushed into the underwater state by subsequent issuance of preferenced shares. In my Experience, this effect explains how startup employees who have stayed with a firm from 10 million dollar valuations to Billion+ valuations do not get anything better than a down payment for their trouble, and a 3x increase in a publicly traded companies stock can easily push an engineer's RSUs to 1.5x+ their salary per year.

jiveturkey 6y ago
Thanks for the followup, much more well formed. To a few specific points: > the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above. Yes. This is all but required by "the rules". > subsequent rounds increase the number of outstanding preference shares Yes, but by lesser and lesser amounts of dilution, and at higher and higher valuations. Ignoring down rounds, which are much more common than up rounds. But here I think we are talking about a "successful" exit, which as rare as they are, in the majority still leave option holders high and dry anyway. > your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent). True, however in these cases almost everyone (actually everyone, AFAIK) receives RSUs, not options. RSUs have an actual, current value, and do not require any appreciation in price at all. In fact, a loss in price is still valuable to the holder. You can't go underwater with RSUs. (And you can't face uncertain taxes; be forced to make awful decisions; etc.) > On a 10-year liquidity horizon, This is the real problem with equity compensation today. We've outgrown the system under which options were a great incentive. Golden handcuffs, that most exceedingly often, turn into fool's gold. Honestly, it's time for YC to insist on 10 year termination-exercise rights. The appeal of ISOs is still there for early stage companies, but AIUI one can convert from ISOs to NQ's after the 90 day legal requirement, without penalty. win-win. With a 10 year rights, companies are forced to offer sufficient refreshers to keep staff. This is completely fair and will push companies to earlier exits. On the employee side, people need to insist on it as well ... I don't see it happening because it destroys the VC business model.