StartupsJan 8, 2020
GooglePvqf73

Evaluating stock options for VC funded startup - Exercise or not??

Posting this for a friend. The person is leaving the company and primarily needs to understand how to evaluate exercizing his vested stock options. In terms of total options dollar value he has stocks with total worth in range of 15-20K$. Company is in B2B space and not a unicorn. Company is second or third player in the market which has seen a lot M&A happening recently. Company on crunchbase shows a valuation of $150-200 million and has raised around approx. $50 million VC dough. Company has gone through multiple product fit experiments and it has sort of found a fit in North America market. In terms of profitability, it seems a long stretch but the business space in which the company operates has seen multiple M&A with one large competitor. Company is primarily looking at getting acquired and not aiming for IPO. Comparable competitors have exited in 50-150$ million range. Some other Questions - How to do a cost benefit analysis for buying the stock options? - What questions should he ask about FMV? Should he keep something in mind in HR exit interviews? Should he trust the FMV the HR gives him? - Is it required by startups to give all financial information to folks looking to exercise stock options? - Has someone regretted not buying stock options after they left the startup? - Also stock options generally generate 1x return atleast? - What happens to exercised stock options if the company ship sinks? P.S posting for the friend since his company is too small. Genuine discussion only trolls please stay away! #startup #stockoptions

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Airbnb wise taco Jan 8, 2020

I'd not exercise. 1 - Companies looking to get bought == they're not doing well. 2 - Companies looking to get bought == if they do, the price will be a lowball 3 - If you don't know the cap table, there's a good chance even a 150MM exit will still not yield anything. Common shares suck. 4 - Exercising will create an illiquid asset, but the IRS will tax it. 5 - There's no guarantee you'll get 1x. There's no guarantee you'll even get $1. 6 - "sort of market fit" == no market fit. Company might be having trouble raising more after $50MM. Unless there's someone willing to buy the exercised shares in a secondary market, I'd just move on.

Bidgely jTul33 Jan 9, 2020

What do they do at Airbnb? Are you getting RSUs or options?

Airbnb wise taco Jan 9, 2020

RSUs

Bidgely jTul33 Jan 9, 2020

Agree with wise taco.. seems a risky bet to make (Have few friends at my company facing similar challenge). Found a good article which might help. https://hackernoon.com/valuing-stock-options-for-startup-employees-c1b223a74bb8

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lrVE74 Jan 9, 2020

There are other solutions! I work for the ESO Fund and we offer non recourse loans to help finance startup employee stock options! While the risk is potentially too much for a single person, we have a portfolio that allows us to balance the risk! To answer your other questions: if the startup issues more than $5M of equity a year in compensation they may be required to share a Rule 701 Disclosure which sometimes contains financials. While a lot of people believe that stock options aren’t be worth much, when the startup succeeds, it can be life changing. All the early Uber, Github, Stripe, etc employees made enough money to retire after a few years of work!

Google Pvqf73 OP Jan 9, 2020

Uber, GitHub, stripe all had good cash flow from beginning. Here the company is running out of cash and firing people daily. Plus the company has only raised 50 million funding so far and next round of funding doesn't seem to be happening.

Bidgely jTul33 Jan 10, 2020

Found another good article. How common is liquation preference being twice or thrice the return for VCs in bay area? https://www.entrepreneur.com/article/229615