5 ms·

Would you mind sharing the ballpark arithmetic that leads to this conclusion?

by runako 3y ago

darig 3y ago
[dead]
lmeyerov 3y ago
most of the employees came in at later rounds, so play it out. ex: They'd get say $100K in options on paper, but the pitch would be the company is high-growth, so expectation of 2X, 10X, 20X, etc over next few years. That $100K is really $200K next year, $2M the year after, etc. Except they sold the company at a ~flat multiple over the valuation. If employees got RSUs, then at least they made say $65K after short-term capital gains (30%+). But if as options... no growth over the latest valuation's strike price, so nothing. $65K is not $200K and certainly not $2M.. and $0 is even worse. FWIW, I'm a happy customer, am happy for the founders, and hope the new features keep rolling out through the acquisition -- our usage of Loom grows every month! The issue here is not the founders, but HR & VC. This is why joining companies with high valuations is a big risk as the VC's have already set inflated prices that ate your potential payout -- you earn on growth over the strike price at time of joining -- and these high markup companies have a lot of revenue to grow into.
- nlavezzo 3y ago
  That’s not how option pricing works. This is a private company, and it was raising money using preferred shares. The employee shares underlying the options would have been common stock. At least once a year the company would be required to do a 409a valuation to set the FMV for those underlying common shares and thus the strike price for any options in the next year or less. The 409a valuation for common shares is pretty much always going to be significantly discounted vs preferred for a variety of reasons like lack of liquidation preference, lack of liquidity, etc. These discounts are often 50% plus, but the shares likely have a 1:1 economic value to other share classes in a sale, except the most recent preferred that get to use their preference. Anyways the reality is going to be determined by each company’s details, but option strike prices at private companies are generally much lower than the current going price for preferred due to the discounts provided by the 409a valuation.
  - toomanyrichers 3y ago
    Yes. For instance, at an early stage company I co-founded, we saw 409A of 10% of the most recent priced round.
    - lmeyerov 3y ago
      yes, this is very much stage-specific by the time of these $100M+ rounds for $1B unicorns to hire a lot of people, the 90% discount is long gone
      - birken 3y ago
        It might not be a 90% discount but it still will be a >50% discount
        lmeyerov 3y ago
        for companies raising 9 figure later-stage rounds? that's not obvious to me and relevant to this case, often the investor will do a higher valuation (artificially minting a unicorn etc) for optics/vanity reasons, which eats an additional 1+ years of future growth, eliminating the relevance of a discount here and for folks who many not have followed terms above: investors get preferred shares, with rights over these discounted common shares. These include things like veto rights over acquisitions, first money out ("if $200M raised, no one else sees any $ until that $200M is paid back"), and for high-valuation unicorn rounds, often something like a participation multiple ("guaranteed extra $100M profit, so no one sees anything till $300M paid"), high interest rate on convertible debt portions, etc. So beyond the obvious dilution hit of new investors, there are a lot of these gotchas that trade a bigger bank account for heightened exit value risks to employees.
        birken 3y ago
        The people who come up with 409a prices have every incentive to make it as low as possible provided it is somewhat defensible to the IRS. I assure you they can get more creative than saying that the last preferred price was at $X, therefore our hands are tied and the common must be close to that. They can take into consideration the preferred preferences, the current state of the business, the time since the last round, etc. For example, the 409a value can keep going down and down if the value of the business is (defensibly) going down and down, regardless of the last fundraising round.

Would you mind sharing the ballpark arithmetic that leads to this conclusion?

by runako 3y ago

Would you mind sharing the ballpark arithmetic that leads to this conclusion?

darig 3y ago

[dead]

lmeyerov 3y ago

most of the employees came in at later rounds, so play it out. ex: They'd get say $100K in options on paper, but the pitch would be the company is high-growth, so expectation of 2X, 10X, 20X, etc over next few years. That $100K is really $200K next year, $2M the year after, etc. Except they sold the company at a ~flat multiple over the valuation. If employees got RSUs, then at least they made say $65K after short-term capital gains (30%+). But if as options... no growth over the latest valuation's strike price, so nothing. $65K is not $200K and certainly not $2M.. and $0 is even worse. FWIW, I'm a happy customer, am happy for the founders, and hope the new features keep rolling out through the acquisition -- our usage of Loom grows every month! The issue here is not the founders, but HR & VC. This is why joining companies with high valuations is a big risk as the VC's have already set inflated prices that ate your potential payout -- you earn on growth over the strike price at time of joining -- and these high markup companies have a lot of revenue to grow into.

nlavezzo 3y ago
That’s not how option pricing works. This is a private company, and it was raising money using preferred shares. The employee shares underlying the options would have been common stock. At least once a year the company would be required to do a 409a valuation to set the FMV for those underlying common shares and thus the strike price for any options in the next year or less. The 409a valuation for common shares is pretty much always going to be significantly discounted vs preferred for a variety of reasons like lack of liquidation preference, lack of liquidity, etc. These discounts are often 50% plus, but the shares likely have a 1:1 economic value to other share classes in a sale, except the most recent preferred that get to use their preference. Anyways the reality is going to be determined by each company’s details, but option strike prices at private companies are generally much lower than the current going price for preferred due to the discounts provided by the 409a valuation.
- toomanyrichers 3y ago
  Yes. For instance, at an early stage company I co-founded, we saw 409A of 10% of the most recent priced round.
  - lmeyerov 3y ago
    yes, this is very much stage-specific by the time of these $100M+ rounds for $1B unicorns to hire a lot of people, the 90% discount is long gone
    - birken 3y ago
      It might not be a 90% discount but it still will be a >50% discount
      - lmeyerov 3y ago
        for companies raising 9 figure later-stage rounds? that's not obvious to me and relevant to this case, often the investor will do a higher valuation (artificially minting a unicorn etc) for optics/vanity reasons, which eats an additional 1+ years of future growth, eliminating the relevance of a discount here and for folks who many not have followed terms above: investors get preferred shares, with rights over these discounted common shares. These include things like veto rights over acquisitions, first money out ("if $200M raised, no one else sees any $ until that $200M is paid back"), and for high-valuation unicorn rounds, often something like a participation multiple ("guaranteed extra $100M profit, so no one sees anything till $300M paid"), high interest rate on convertible debt portions, etc. So beyond the obvious dilution hit of new investors, there are a lot of these gotchas that trade a bigger bank account for heightened exit value risks to employees.
        birken 3y ago
        The people who come up with 409a prices have every incentive to make it as low as possible provided it is somewhat defensible to the IRS. I assure you they can get more creative than saying that the last preferred price was at $X, therefore our hands are tied and the common must be close to that. They can take into consideration the preferred preferences, the current state of the business, the time since the last round, etc. For example, the 409a value can keep going down and down if the value of the business is (defensibly) going down and down, regardless of the last fundraising round.