Preferred share price vs fair market value
I am talking to a startup which offered me stock options. When translating the equity share into $$ value: 1- should I use the preferred share price or FMV? 2- how should I read the preferred share value? 3- when the company does not disclose their number of outstanding shares, how should I interpret this? 4- if I get equity worth of say X dollars from another public company, how much of that should the startup offer match on paper at least? Thanks.
Long story long, if external people are already buying shares on the second market (e.g. Uber), simply take the number of shares you get and multiply it by the current share price. If not, then your TC = base salary + annual bonus (if any). The rest has zero value. For the paper money, we can’t really answer how much because it varies a lot based on the stage. Seed? Series A, B, etc. if it’s an early stage startup you don’t want to negotiate based on a number of shares or a dollar amount. You want to negotiate on the percentage of ownership (e.g. 0.5%, 0.2%, etc). Passed series A then yeah, the more monopoly money you get, the better. To keep things very simple, cut that number by at least 3-4 to get closer to real net amount you may get at the end (e.g. $6 million = $1.5). If that startup becomes a unicorn, like Uber or FB, expect to make close to the original amount if you joined late (minus taxes) and probably double, triple if you joined early (because of refreshers and price hike). Employee number 20 would reach 10 millions while employee 40 would get 5 millions. It goes down extremely fast, timing is everything. Then after the IPO, yes your stocks can triple or get split by half like lyft, we can’t predict the future.
Tl;dr Regarding #4 you need at least 10x paper money to be equivalent to public company, and probably more if your startup doesn’t give you refreshers. Economic theory says a rational risk averse person should expect more money if they are taking higher risk. The reality of startups is that this isn’t the case. Even if you’re risk neutral you’ll be better off staying at FB or similar. A back of the envelope way I would compute what you would need is this fomula: public_company_tc = probability_failure * 0 + probability_ipo * share_value_post_ipo + probability _other_exit * what_you_get_in_this_scenario The non-ipo exits tend not to be good for employees, so I would just assume that is zero. I would also assume the share value won’t grow a ton from what you’re offered, because we’ll assume the efficient market hypothesis is roughly accurate. Then we’ll assume you have a 10% chance of ipo exit, which is generous but since I’m being conservative in lots of other factors probably ok. All this gets you to that 10x number.