Any resources to understand and negotiate startup equity and options? I'm trying to understand how to evaluate a startup offer against those from publicly traded companies. TC 240k YoE 5 years
Options have a strike price. They give you the right to purchase stock at that price. If the price of each common stock goes up, so too the value of each option goes up. The value of the exercised option is the difference between the stock price and the strike price. The price of a stock isn’t the same as its value. For instance, private company shares are illiquid assets and therefore you need to add a liquidity discount of about 20% to make it comparable to the value of a liquid asset. The other wrinkle is the difference in stock price and value of a preferred share vs. a common share. Preferred shares are often a lot more valuable. So when you see private company valuations, they almost always reflect the valuation of shares that have certain preferences. Depending on the preferences, it could reflect 10-40% of a premium above common shares, so that’s a 10-30% cut. The final component of value is adjusting for risk. Most startups fail. So while a startup’s stock price can 10x or 100x it can also go down to 0. That’s the most likely outcome. So if you’re a risk averse person, you should value startup stock less. I’m sure some economist has modeled this out in a utility curve or indifference equation. So your equation looks something like this. Startup equity compensation: number of options * [fair market value of preferred shares * (1-common share discount) - strike price] * (1-liquidity discount) * (1-risk discount) * vesting schedule annual payout fraction.
Depending on stages of start up. A few in garage or months before IPO
Startup equity = (FMV - strike price) * number of options
Not quite … replace FMV (the lowest price the government will allow the strike price of stock options to be granted to an employee at the time of the grant) with “preferred” share value (the price paid by those who participated in the most recent round). Options are granted at the FMV, and the preferred share value is usually already quite a bit higher, putting you in the black immediately (but not vested and no liquidity)