6 ms·

Ask HN: Need help in understanding private equity offer

31 points by imheretolearn 4y ago

Hi, I have a friend that is being issued 10k shares over a period of 3 years at a valuation of $70B. The company recently raised $17M in funding and it is a very early stage startup. The strike price is $0.01. Can someone help me understand what this means? What are the pros and cons of accepting it? Edit: The total number of shares will be limited to 607,500,000

retube 4y ago
Impossible to answer without, at a minimum, knowing how many shares have been issued.
abrichr 4y ago
Without knowing the total number of shares, it's impossible to know what your friend's 10k shares would be worth. e.g. if there are 100M shares total, then his shares would be worth 10k/100M = 0.0001 of the valuation of $70B, i.e. $7M. In order to own these shares, he would have to exercise the options, meaning he would need to pay the strike price of $0.01 per share, i.e. 10k * $0.01 = $100. Also important to note is the tax treatment of these shares. Depending on the jurisdiction, it's possible that he would be taxed on the value of these shares when they are exercised, and not when they are sold. In the example above, that would mean that he would owe taxes on $7M whenever they were exercised. Check out something like https://smartasset.com/investing/how-do-stock-options-work https://smartasset.com/investing/how-do-stock-options-work or https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation for more info. (I just found these by googling [guide to stock option compensation].)
- imheretolearn 4y ago
  The total number of shares will be limited to 607,500,000
  - s1artibartfast 4y ago
    This is incomplete information. Shares will be limited in what context? Employee option pool, this round, ect. As far as I know, early-stage companies don't put an upper cap on the number of shares that can exist in the future. Is this some sort of crypto company?
  - iaw 4y ago
    If you believe that valuation then it's ~$1.5M over 3 years. I would personally ask for explanation of the $70B valuation because if it goes for a piddling $500M your friend gets ~$11K over 3 years
    - rkk3 4y ago
      > if it goes for a piddling $500M your friend gets ~$11K over 3 years They would get 0, you aren't accounting for seniority.
  - icedchai 4y ago
    This is impossible to guarantee. The company may need to raise more money, likely through equity, not debt. To issue more equity, they will need to issue more shares. That is just how it works.
  - psyklic 4y ago
    It seems strange to cap the number of shares, which makes me wonder if this is the number of shares in an option pool. If so, nothing can be inferred about percentage ownership, except that your friend would likely own a very insignicant number of shares. Note that a new company typically allocates 10M shares, so it's additionally unclear why now there are so many.
_256 4y ago
heres a good resource https://carta.com/blog/exercising-stock-options/ https://carta.com/blog/exercising-stock-options/.
ericbarrett 4y ago
Divide the number of shares your friend is getting by the total outstanding. Then multiply that ratio by the valuation, and you've calculated the "value" of the grant. With the following serious caveats: * Almost any pre-IPO company is going to eventually issue more shares. (Post-IPO, too.) This will dilute existing stock and option grants. Typically companies do refresher grants when this happens—to employees who are still present and performing. Unless it's in your employment contract, you are not entitled to automatic compensation for your existing shares when this happens. The board could issue another 50 billion shares tomorrow and give them all to other people. * Private valuations are often fairy tales; it's very common to see these slashed in half or more overnight, especially in a business environment where a company needs to keep raising cash. Companies that are undervalued at the $70B level are few and far between—there's a reason we call them "unicorns." Your friend should 100% talk to a lawyer (not an accountant) about potential taxes. It'll probably cost about $2-4,000 and could save them 100x that much.
thoughtstheseus 4y ago
The $70 billion valuation is suspect. Far too high for nearly all early stage companies. SpaceX raised last year (?) around $100 billion for reference.
- pgwhalen 4y ago
  I think you misspoke? No company in history has ever raise $100b in a year, but that’s about what SpaceX is valued at now.
  - s1artibartfast 4y ago
    Spacex has raised about 8B total since founding in 2002
  - qeternity 4y ago
    OP clearly means they raised around a $100b valuation.
    - pgwhalen 4y ago
      That’s why I assumed it and politely clarified.
    - thoughtstheseus 4y ago
      Perhaps I was not clear enough ;). Thank you for clarifying, much appreciated.
- bspear 4y ago
  Think OP meant $70M not $70B if they just raised $17M in funding. To calculate your gross $ value today, you need to know your # of shares (10K) divided by total fully diluted outstanding shares (607,500,000) multiplied by the valuation (probably $70M). Strike price is your cost to exercise the options, which should be deducted from your gross value. You will likely also incur taxes unless you exercise right away via 83B election
  - 4y ago
rkk3 4y ago
> at a valuation of $70B. > it is a very early stage startup. One of these does not fit.
- unstatusthequo 4y ago
  Maybe that B is an M?
  - rkk3 4y ago
    Could be but with 607.5MM shares outstanding, that 10k full vest would have a FMV of of a few hundred dollars - they wouldn't even need to give options
  - imheretolearn 4y ago
    Nope, it is a B
    - nknealk 4y ago
      Raising 17M dollars at a 70B valuation is insane for an early stage company. Assume the shares are worthless. Consider avoiding the company all together because whoever is at the top has no clue how finance works. At 70M the calculus is much different.
    - rkk3 4y ago
      Well then the information you shared strains credulity, facts seems inconsistent & extremely odd- Why is a 17MM financing even worth mentioning if its worth 70B? And there are only a handful of companies even in that ballpark https://en.wikipedia.org/wiki/List_of_unicorn_startup_companies https://en.wikipedia.org/wiki/List_of_unicorn_startup_compan...
s1artibartfast 4y ago
You will need to know the number of share that have been issued to calculate the current price per share. Price per share also has tax implications. Strike price means they will have to pay 0.01 per share or $100 total for the stock, which is largely irrelevant. For example, If only 20k shares have been issued, they will have to pay income taxes on 35B over 3 years. Is 70B the valuation they are being offered stock at or what the 17m investors payed? https://carta.com/blog/equity-101-exercising-and-taxes/ https://carta.com/blog/equity-101-exercising-and-taxes/ https://secfi.com/learn/exercise-stock-options-tax-implications https://secfi.com/learn/exercise-stock-options-tax-implicati...
stouset 4y ago
Given the extremely suspect numbers here, your friend should assume they are receiving $0 in equity.
brudgers 4y ago
10k is 1% of a million. So <0.018% of 607 million. At a company exit at $6 billion (very unlikely), the shares would be worth about $120,000. For perspective Twitter went public at $14 billion and Google at $23 billion. So a Google size IPO would be less than half a million dollars. That’s without additional dilution, liquidation preferences for preferred stock, and getting fired to increase returns for those first in line. And less exercise price. And capital gains taxes. It’s not a bullshit offer, because the company hopes your friend believes in it. That makes it horseshit. Good luck.
- brudgers 4y ago
  I don’t usually comment on my own posts, but… The important takeaway is the offer is a tell. The founders are giving fair warning that they do not want your friend to get rich. That’s different from not caring if your friend gets rich. Quite different from being happy if your friend gets rich. And the polar end of the goodwill spectrum from trying to make your friend rich.

31 points by imheretolearn 4y ago

retube 4y ago

Impossible to answer without, at a minimum, knowing how many shares have been issued.

abrichr 4y ago

Without knowing the total number of shares, it's impossible to know what your friend's 10k shares would be worth. e.g. if there are 100M shares total, then his shares would be worth 10k/100M = 0.0001 of the valuation of $70B, i.e. $7M. In order to own these shares, he would have to exercise the options, meaning he would need to pay the strike price of $0.01 per share, i.e. 10k * $0.01 = $100. Also important to note is the tax treatment of these shares. Depending on the jurisdiction, it's possible that he would be taxed on the value of these shares when they are exercised, and not when they are sold. In the example above, that would mean that he would owe taxes on $7M whenever they were exercised. Check out something like https://smartasset.com/investing/how-do-stock-options-work https://smartasset.com/investing/how-do-stock-options-work or https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation for more info. (I just found these by googling [guide to stock option compensation].)

imheretolearn 4y ago
The total number of shares will be limited to 607,500,000
- s1artibartfast 4y ago
  This is incomplete information. Shares will be limited in what context? Employee option pool, this round, ect. As far as I know, early-stage companies don't put an upper cap on the number of shares that can exist in the future. Is this some sort of crypto company?
- iaw 4y ago
  If you believe that valuation then it's ~$1.5M over 3 years. I would personally ask for explanation of the $70B valuation because if it goes for a piddling $500M your friend gets ~$11K over 3 years
  - rkk3 4y ago
    > if it goes for a piddling $500M your friend gets ~$11K over 3 years They would get 0, you aren't accounting for seniority.
- icedchai 4y ago
  This is impossible to guarantee. The company may need to raise more money, likely through equity, not debt. To issue more equity, they will need to issue more shares. That is just how it works.
- psyklic 4y ago
  It seems strange to cap the number of shares, which makes me wonder if this is the number of shares in an option pool. If so, nothing can be inferred about percentage ownership, except that your friend would likely own a very insignicant number of shares. Note that a new company typically allocates 10M shares, so it's additionally unclear why now there are so many.

_256 4y ago

heres a good resource https://carta.com/blog/exercising-stock-options/ https://carta.com/blog/exercising-stock-options/.

ericbarrett 4y ago

Divide the number of shares your friend is getting by the total outstanding. Then multiply that ratio by the valuation, and you've calculated the "value" of the grant. With the following serious caveats: * Almost any pre-IPO company is going to eventually issue more shares. (Post-IPO, too.) This will dilute existing stock and option grants. Typically companies do refresher grants when this happens—to employees who are still present and performing. Unless it's in your employment contract, you are not entitled to automatic compensation for your existing shares when this happens. The board could issue another 50 billion shares tomorrow and give them all to other people. * Private valuations are often fairy tales; it's very common to see these slashed in half or more overnight, especially in a business environment where a company needs to keep raising cash. Companies that are undervalued at the $70B level are few and far between—there's a reason we call them "unicorns." Your friend should 100% talk to a lawyer (not an accountant) about potential taxes. It'll probably cost about $2-4,000 and could save them 100x that much.

thoughtstheseus 4y ago

The $70 billion valuation is suspect. Far too high for nearly all early stage companies. SpaceX raised last year (?) around $100 billion for reference.

pgwhalen 4y ago
I think you misspoke? No company in history has ever raise $100b in a year, but that’s about what SpaceX is valued at now.
- s1artibartfast 4y ago
  Spacex has raised about 8B total since founding in 2002
- qeternity 4y ago
  OP clearly means they raised around a $100b valuation.
  - pgwhalen 4y ago
    That’s why I assumed it and politely clarified.
  - thoughtstheseus 4y ago
    Perhaps I was not clear enough ;). Thank you for clarifying, much appreciated.
bspear 4y ago
Think OP meant $70M not $70B if they just raised $17M in funding. To calculate your gross $ value today, you need to know your # of shares (10K) divided by total fully diluted outstanding shares (607,500,000) multiplied by the valuation (probably $70M). Strike price is your cost to exercise the options, which should be deducted from your gross value. You will likely also incur taxes unless you exercise right away via 83B election
- 4y ago

rkk3 4y ago

> at a valuation of $70B. > it is a very early stage startup. One of these does not fit.

unstatusthequo 4y ago
Maybe that B is an M?
- rkk3 4y ago
  Could be but with 607.5MM shares outstanding, that 10k full vest would have a FMV of of a few hundred dollars - they wouldn't even need to give options
- imheretolearn 4y ago
  Nope, it is a B
  - nknealk 4y ago
    Raising 17M dollars at a 70B valuation is insane for an early stage company. Assume the shares are worthless. Consider avoiding the company all together because whoever is at the top has no clue how finance works. At 70M the calculus is much different.
  - rkk3 4y ago
    Well then the information you shared strains credulity, facts seems inconsistent & extremely odd- Why is a 17MM financing even worth mentioning if its worth 70B? And there are only a handful of companies even in that ballpark https://en.wikipedia.org/wiki/List_of_unicorn_startup_companies https://en.wikipedia.org/wiki/List_of_unicorn_startup_compan...

s1artibartfast 4y ago

You will need to know the number of share that have been issued to calculate the current price per share. Price per share also has tax implications. Strike price means they will have to pay 0.01 per share or $100 total for the stock, which is largely irrelevant. For example, If only 20k shares have been issued, they will have to pay income taxes on 35B over 3 years. Is 70B the valuation they are being offered stock at or what the 17m investors payed? https://carta.com/blog/equity-101-exercising-and-taxes/ https://carta.com/blog/equity-101-exercising-and-taxes/ https://secfi.com/learn/exercise-stock-options-tax-implications https://secfi.com/learn/exercise-stock-options-tax-implicati...

stouset 4y ago

Given the extremely suspect numbers here, your friend should assume they are receiving $0 in equity.

brudgers 4y ago

10k is 1% of a million. So <0.018% of 607 million. At a company exit at $6 billion (very unlikely), the shares would be worth about $120,000. For perspective Twitter went public at $14 billion and Google at $23 billion. So a Google size IPO would be less than half a million dollars. That’s without additional dilution, liquidation preferences for preferred stock, and getting fired to increase returns for those first in line. And less exercise price. And capital gains taxes. It’s not a bullshit offer, because the company hopes your friend believes in it. That makes it horseshit. Good luck.

brudgers 4y ago
I don’t usually comment on my own posts, but… The important takeaway is the offer is a tell. The founders are giving fair warning that they do not want your friend to get rich. That’s different from not caring if your friend gets rich. Quite different from being happy if your friend gets rich. And the polar end of the goodwill spectrum from trying to make your friend rich.