Fair stock options for a post series-C startup

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S. Yu

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Dec 18, 2012, 1:45:38 AM12/18/12
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Hi, 

I got an offer from a pretty hot startup. The offer gives me 0.03% of stock options. The company has around 120 people. It has got its C series funding already and is approaching being profitable. In this case, does the table 3-1 on page 51 still apply, as the number is adjusted for companies with series A funding. If the table's numbers still apply, this offer seems very low. I'm a programmer with more than 8 years of experience. The offer's salary is quite decent compared to other companies, but it is more than 40% of pay cut for me. Does this mean I could ask for more stock options, or it is not really relevant? Actually, I wasn't actively looking but the company's recruiter contacted me. Should I get multiple offers from some other startups for a better negotiation position? 

Thanks, 

Piaw Na(蓝俊彪)

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Dec 18, 2012, 5:06:30 AM12/18/12
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Yes the numbers still apply because they're not profitable. However you'll need multiple offers before they will negotiate anyway. Or if the salary is to much of a pay cut, just laugh at them at walk away.

James Ausman

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Dec 18, 2012, 1:34:12 PM12/18/12
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I am in a similar situation. I think that for larger startups, you
should consider the value of the equity, since they have a firmer
valuation.

You should be able to calculate the value of the equity if you know
the number of shares outstanding and the valuation, this should give
you a pretty good idea of the value of the stock per share.

Let's say you have an offer for 100,000 shares vesting over 4 years
with a strike price of $10. That is an option on $1M worth of stock,
or $250k/yr.

It is easier to estimate value if they are giving you a stock grant,
but this also has undesirable tax consequences. For options, you
should probably do a Black-Sholes calculation, but a call option
cannot be worth more than the underlying stock. You should work out
what you think it is worth yourself, but it will be something pretty
close to $10 per option in the above example for a typical start-up.

I think it is appropriate to then include a liquidity and risk
discount for pre-IPO shares or options. Each person has a different
risk profile, but 0.7 or 0.5 is entirely appropriate. I used 0.5 when
I did my calculations.

Now I have a question for you: the company I am considering an offer
from has a widely different 409a valuation for their common shares,
compared to the valuation of the most recent funding for the
preferreds. Which value should I use in my formula?

In the above example, let's say that the 409a valuation was $10/share
but the value at the last round of funding was $20/share. Should I
consider this options on equity worth $1M or $2M? I don't think that
there is a clear answer, just curious what you think.

Thanks,
Jim
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