I received an offer from a private company which specifies that I am given 10 year option to purchase 60,000 shares at the current fair market value of $8.00 which would vest monthly over 4 years with a 1 year cliff. Then the recruiter showed me a table that looked like so: Current valuation: 2B [1] if future valuation = 1B, then I make 55K/year [2] if future valuation = 2B, then I make 175K/year [3] if future valuation = 4B, then I make 400K/year I am having a hard time believing that if the valuation remains the same or drops I will make any money from the options. Can you please help me figure out what's going on here... # TC supposedly 395K at current valuation YOE 9 # Please don't ask me to name the company at this point before I have made sense of things.
at any valuation below 2b you lose money. at 4b you make (16 - 8) * 60,000 / 4 a year working out to 120k
Mind if I ask what company this is that is putting such an offer. Maybe you can DM me 😀
So, you want me to use my precious DM credits to give you info that I didn't want to share in the first place in exchange for absolutely nothing? What a great deal... How can I resist?!
Oh, you're talking about options. Yes, you can still make money on options even if the share price is below the strike price. The length of the options is super key info you have left out.
Updated post. The length is 10 years. I didn't realize that private company options have time baked into them similar to the options you buy on CBOE... Do they really?
Their would be "option value" if they were public sellable.....compensation options are NOT to my knowledge
The fmv is generally lesser than the preferred share price. And the fmv is used as the strike price while the preferred share price is used for public valuation. The numbers you quote are possible.
@irkrlktok Thanks!! That really helps. I will research the difference.
Typically the "value of an award" at grant where strike price equals fair market value, which is observable in a public traded company, is about one third the total value of the options. So, if that standard were to be applied here, the current value would be 160K. For a private company that would be a total crap shoot (unless maybe you can sell shares or options in some private market). In any case, if value never goes up, I think you get nada (again, unless you can sell unexercised options in private market, which I would think is very unlikely) but you dont technically lose money, unless you exercise hold and then it drops, otherwise you just lose opportunity to earn actual $ elsewhere.
Ok, then the math people have shared above is wrong. 10 year options have value even if underwater.
I understand your comment about the baked-in time premium, but doesn’t OP lose that premium when he exercises? The moment you exercise the call options, you call away some N shares from the “market” which you then liquidate. So, the way I see it you get nothing if the current price is below my strike price... I don’t think that you can sell the options themselves to take advantage of the baked-in time premium... Not sure though, just brainstorming.
Yes, if he or she exercises, then option value goes poof. Normally you shouldn't exercise until the end so you can maximize the option value.
There are other things to consider is whether you get ISOs or NQSOs. If you leave after 4 years and the company is not public, you will have to pay 480k to exercise. If it’s ISO then you have to do it in 3 months (though you get favorable taxation)
I get 10 years. Confirmed that part with the recruiter just in case.
The 10 years number is how long the options are valid for before they dissolve. Ask your recruiter, how much time you have to exercise if you leave the company. For ISO it is 3 months and for NQSO it’s 7 years
Read this before accepting any startup offer https://blog.alexmaccaw.com/an-engineers-guide-to-stock-options
Thanks!
You misunderstood what strike price you're being offered. It's probably that the strike is something like $3 at 409a and the preferred price is $11, for a spread of $8. So if valuation drops (and crucially, you are allowed to sell shares), you would make money still since your options are in the money.
I don’t get it. Buying 60,000 share at $8 = $480,000. If stay the same, you make $0. If drop by 50%, you lost $240,000. If double, you make $480,00. That’s how I see it.