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9/10 startups fail (90%). Of the 10% that succeed, 90% do not payout to anyone but the investors and founders with preferred shares. That is to say, there is
by nelsonenzo 6y ago
9/10 startups fail (90%). Of the 10% that succeed, 90% do not payout to anyone but the investors and founders with preferred shares. That is to say, there is a 1% chance those shares pay out to you, the non-preferred share holder.
So take the current strike price * # of shares offered * .01 = how much they are actually worth.
So, if they are offering you 100,000 shares
100,000 * .01 = 1,000
1,000 * $1 = $1,000
The shares are worth $1,000 dollars. So you can accept $89,000, or they can bolster the share amounts, or they can change the shares to prefered.
EDIT: I realized now you said ESOP - so these are actually tradable shares on the stock market. They are worth face value of the stock price right now then, and it's up to you to decide if you will get wealthier or poorer based on this investment.
If you want to be pedantic, this is a good article with the things you need to consider with regards to how you can collect these funds and the tax considerations: https://cleartax.in/s/taxation-on-esop-rsu-stock-options https://cleartax.in/s/taxation-on-esop-rsu-stock-options
- stefanDM 6y agoThanks for the info. I'm still a bit confused though. Correct me if I'm wrong, but the strike price is not necessarily the value of the stock, no? Plus I would need to subtract it from the value of the stock in order to exercise the option. So let's say after 4 years I want to exercise 100,000 stocks at 1$ strike price each. Let's say the the current valuation is 5$ per stock. My return is 100,00$ * 5, minus the cost of the strike price (100,000$). In total that's 400,000$ So I'm not sure why the strike price is used to define the value, since I would need to pay that amount anyway. I would make a profit for any dollar for which the stock is valued after the strike. Or am I getting it wrong?
- nelsonenzo 6y agoYou are right, thank you for correcting me. So to add for others: > stock option strike price is usually equal to the FMV of the company’s stock on the day the option is granted. ergo, if the strike price when the options are granted is $1, they are worth $1, and your cost to exercise is to purchase them at $1. Ergo, as stefanDM points out, they have no additional value to your salary on day 1. They only have value if 1) They increase in value AND 2) They become tradeable on either a public or private exchange / are purchased by another company. I found this article to be useful: https://carta.com/blog/equity-101-stock-economics/#:~:text=For%20private%20companies%2C%20FMV%20is,day%20the%20option%20is%20granted https://carta.com/blog/equity-101-stock-economics/#:~:text=F....
- el_dev_hell 6y agoAdding to the above, which is pretty accurate for a personal evaluation. Don't share that "math" with the employer during your negotiation.