Evaluate job offer with stock options

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jpfern15
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Joined: Thu Jan 22, 2015 10:55 pm

Evaluate job offer with stock options

Post by jpfern15 » Tue Oct 08, 2019 1:01 pm

Received a job offer and am looking to evaluate. The company is a startup that has gone through four funding rounds (series D). Based on my own research I am confident there is an exit plan in the next few years. Numbers have been altered for confidentiality but percentages remain the same.

Stock Options (ISO):
50,000 shares (common) vested over 4 years. Can exercise 10 years from grant date (including post-termination) once at the company for 3 years.
Preferred share price: $20
409A price (exercise price): $7.20

Liquidation Multiple: 1x for all investors
Non-Participating rights for all investors

Total shares: 190 million


Options is a new thing for me and I don't fully understand it. Any insights around this offer would be helpful.
Last edited by jpfern15 on Tue Oct 08, 2019 1:58 pm, edited 7 times in total.

DonIce
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Re: Evaluate job offer with stock options

Post by DonIce » Tue Oct 08, 2019 1:10 pm

I think you'll have to be a bit more specific about the details of the option offer? What is the price at which you can exercise the options? Also, if the stock is not publicly traded, it is possible that it may never be worth anything, or may be worth much less than leadership is currently projecting. Many "unicorns" have had trouble with their IPOs recently.

Topic Author
jpfern15
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Joined: Thu Jan 22, 2015 10:55 pm

Re: Evaluate job offer with stock options

Post by jpfern15 » Tue Oct 08, 2019 1:15 pm

DonIce wrote:
Tue Oct 08, 2019 1:10 pm
I think you'll have to be a bit more specific about the details of the option offer? What is the price at which you can exercise the options? Also, if the stock is not publicly traded, it is possible that it may never be worth anything, or may be worth much less than leadership is currently projecting. Many "unicorns" have had trouble with their IPOs recently.
Apologies. Exercise price is the 409a price. I understand the risks if the company doesn't go public or be worth less. More curious to see how this translates if they do indeed IPO.

shess
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Re: Evaluate job offer with stock options

Post by shess » Tue Oct 08, 2019 1:35 pm

jpfern15 wrote:
Tue Oct 08, 2019 1:01 pm
Received a job offer and am looking to evaluate. The company is a startup that has gone through four funding rounds (series D). Based on my own research I am confident there is an exit plan in the next few years. Numbers have been altered but

Base: $220k

Options:
50,000 shares (common) vested over 4 years
Preferred share price: $20
409A price: $7.20

Total shares: 190 million

Options is a new thing for me and I don't fully understand it. Any insights around this offer would be helpful.
My general approach was to assume my options would expire worthless, and concentrate on the base pay. A quality company will give you decent base pay plus options, for most individual contributors you wouldn't try to lower salary in exchange for options because individual contributors simply aren't given enough information to evaluate the trade-offs, nor are they generally in a position to really move the needle that much in helping the company succeed. So IMHO make sure you will be at least satisfied with your base pay alone, and certainly don't put yourself in a position where you're having cashflow troubles.

Note that even companies which do well enough to get acquired often don't cash out the individual contributors as well as an IPO could, and these days things don't evolve towards IPO the same way they did in the dotcom boom. Often acqui-hires structure to have a nice payout after you've come onboard and stayed at the new company for awhile, rather than paying out against your previous shares and risking that you'll move on quickly.

Personally, the main signal I have come to trust on evaluating a startup is whether you really want to work with the people. The most lucrative one I worked with gave me a significant pay cut versus my existing position and other offers on the table, but in the end the argument I made to my wife is that I'd never forgive myself if I didn't go work with those people, every single person I interacted with in the lead-up was top-notch. The less lucrative cases were all still excellent experiences where I learned a lot and grew my network. Even if a given company doesn't succeed financially, working with great people pays long-term dividends.

Is "409A price" basically the strike price you're going to get? If so, I guess you won't have a lot of room for early exercise (assuming they're ISOs). Mostly that means that it will be challenging to build a long-term position because of the way taxes work WRT exercise, so you'll mostly be looking at flipping options and paying income taxes. This isn't the worst problem in the world, but it probably factors in if you want to layer in a tax discount, and it also interacts with your tenure (you'll have to sell remaining options within 90 days of leaving) and with option lifetimes (generally 10 years).

Topic Author
jpfern15
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Re: Evaluate job offer with stock options

Post by jpfern15 » Tue Oct 08, 2019 1:44 pm

shess wrote:
Tue Oct 08, 2019 1:35 pm
Is "409A price" basically the strike price you're going to get? If so, I guess you won't have a lot of room for early exercise (assuming they're ISOs). Mostly that means that it will be challenging to build a long-term position because of the way taxes work WRT exercise, so you'll mostly be looking at flipping options and paying income taxes. This isn't the worst problem in the world, but it probably factors in if you want to layer in a tax discount, and it also interacts with your tenure (you'll have to sell remaining options within 90 days of leaving) and with option lifetimes (generally 10 years).
Thank you for your reply on this. I also added a few more pieces of info in my original post which may help.

Can you explain a little more about the quoted section? Also for clarity, this company provides 10 years (instead of 90 days) to exercise from the date of grant once I've been with the company for three years.

CAP_theorem
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Re: Evaluate job offer with stock options

Post by CAP_theorem » Tue Oct 08, 2019 3:02 pm

I don’t have time for an involved response, but no matter what research you have done that makes you think there will be an exit you should still value the options at zero. Years? Way too far away to consider seriously.

The expected range of outcomes even for a company doing well is not in your favor. It’s also not a lot of stock period. FB or Google will give you that much in RSUs which are almost as good as cash.

I don’t work for options anymore. They can give them to me, but they still have to compete on cash or almost as good as cash equivalents.

If you have other opportunities that are less stock heavy but ate better and/or offer other benefits (perks, interesting work, better peers, better pedigree) you should strongly consider them.

jaxinvestor
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Re: Evaluate job offer with stock options

Post by jaxinvestor » Tue Oct 08, 2019 3:36 pm

Other posters provided some great advice. I worked for two different biotech companies that issued options as part of their total compensation package on an annual basis. Both companies were already public companies. In my mind, I always valued the options as worth ZERO regardless of the difference between the current stock price and the option grant price...... In doing so, we were forced to stick to our budget and not count on a windfall...

One company went bankrupt and options were truly worth ZERO.

The second company was bought out by a big pharma. Those options were worth more than ZERO.

My advice is expect them to be worth ZERO. If they become valuable, look towards selling them on your terms to control the tax consequences.

PS - Always use a cashless exercise approach. The profit will be taxed as ordinary income. Do not exercise the options and hold the stock, there are immediate and generally quite painful tax consequences of doing so.

shess
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Joined: Wed May 17, 2017 12:02 am

Re: Evaluate job offer with stock options

Post by shess » Tue Oct 08, 2019 3:40 pm

jpfern15 wrote:
Tue Oct 08, 2019 1:44 pm
shess wrote:
Tue Oct 08, 2019 1:35 pm
Is "409A price" basically the strike price you're going to get? If so, I guess you won't have a lot of room for early exercise (assuming they're ISOs). Mostly that means that it will be challenging to build a long-term position because of the way taxes work WRT exercise, so you'll mostly be looking at flipping options and paying income taxes. This isn't the worst problem in the world, but it probably factors in if you want to layer in a tax discount, and it also interacts with your tenure (you'll have to sell remaining options within 90 days of leaving) and with option lifetimes (generally 10 years).
Thank you for your reply on this. I also added a few more pieces of info in my original post which may help.

Can you explain a little more about the quoted section? Also for clarity, this company provides 10 years (instead of 90 days) to exercise from the date of grant once I've been with the company for three years.
I found this book and site useful back in the day: https://fairmark.com/books/consider-your-options/ . The equity compensation section of the site has tons of info, and the forums sometimes have useful info.

IMPORTANT: You can spend years learning and arguing about this esoteric stuff. Seriously, been there, done that. But this type of information really is secondary optimization stuff, mostly worth worrying about once you find yourself in the situation. It's easy to fall down this rabbit hole and miss more-important signals, such as about the basic viability of the company!

ISOs are a form of option generally structured so that you can early exercise (pay strike price) before vesting and start the clock ticking on long-term gains. There are various rules involved which make it more complicated, so you want to look into those. You pay taxes on any imputed gains between your strike price and the current price, which a lot of people shot themselves in the foot with in the dotcom boom. The common high-tech approach is that you do this early exercise immediately after grant, when the stock price and strike price are the same, so you don't get tax problems. Usually, this is the kind of thing that you have to move on within the first few weeks of employment, between the board meeting which sets your strike price and the next meeting (which might bump it up again).

But 50k shares at $7/share is a lot to come up with for an early exercise! Of course, the flip side of that is $7/share valuation indicates the company is getting close to the IPO decision point (which usually aims for around $12/share for various reasons).

ISOs which are not early exercised work mostly like non-qualified options. Non-qualified options are what people get post-IPO (assuming they don't just switch to restricted stock units at that point). In these cases, you can exercise vested options for the strike price, plus you have to pay income taxes on the difference between strike price and the current value (the bargain element). There is no financial benefit to exercising and holding vesting non-qualified options versus selling them and buying shares in the open market (though you may be restricted from buying shares in the open market as an employee, so that can factor in). There are various exercise techniques, but probably the most common is where you basically borrow the strike price to exercise options immediately sell the resulting shares on the market and pay back the loan, so you aren't out-of-pocket.

My point on the 90 days is that USUALLY companies structure the option agreement such that you have to liquidate within 90 days of separating from the company, which can force you to take a huge income-taxable lump sum that you might have otherwise spread across a couple years. But it sounds like this agreement is different for this case.

shess
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Re: Evaluate job offer with stock options

Post by shess » Tue Oct 08, 2019 4:04 pm

jaxinvestor wrote:
Tue Oct 08, 2019 3:36 pm
One company went bankrupt and options were truly worth ZERO.

The second company was bought out by a big pharma. Those options were worth more than ZERO.

My advice is expect them to be worth ZERO. If they become valuable, look towards selling them on your terms to control the tax consequences.
I thought I had shared my experience, but I don't find it, so ... I had two IPO experiences with tech startups. In both cases I joined about 18 months before IPO, in both cases I received ISOs in my hiring grant.

In one case, I was very nicely situated on paper on IPO day, and and next day, and then things trended downward for the rest of the lockup period. By the time I could sell, the payout was no longer life-changing, it was more like a nice yearly bonus, and that's where it stayed for the rest of my time there.

In the other case, the on-paper value at IPO was of similar magnitude, but the stock continued driving forward year after year, to the point where I would periodically sell shares simply to reduce my level of terror. This payout was life-changing, and I'm currently retired fairly early.

So, here's the thing, based on experiences of friends and colleagues, BOTH cases were probably above-average for the industry, and in any case you don't have the option of buying the average. Your company will do what your company will do, good companies with strong stories often do quite poorly for a variety or reasons. The most prudent thing to do is not to focus on the potential value of your option grant, the most prudent thing to do is to focus on what aspects of the company and it's employees will make that option grant valuable.

Kind of a secondary consideration, in the case of the second company above, I had plenty of colleagues who joined post-IPO and did very very well simply by being strong employees at a strong and growing company. I'd not be surprised to find out some did better than I did (I'm not super ambitious, once my day was full of interesting work and few restraints, I didn't push for further promotion).

Jack FFR1846
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Re: Evaluate job offer with stock options

Post by Jack FFR1846 » Tue Oct 08, 2019 4:27 pm

I also value options at zero. I've worked for tech companies for over 30 years. Most granted some number of stock options. Out of 5, 2 made me a couple hundred dollars, one made me a boatload of money (and was later investigated by the SEC, but as an uninvolved peon, I wasn't hurt) and the rest went under water and were truly worth zero.
Bogle: Smart Beta is stupid

Spirit Rider
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Re: Evaluate job offer with stock options

Post by Spirit Rider » Wed Oct 09, 2019 2:12 am

I have been involved in three startups with significant options in all of them and even founder's shares in the last two amounting to single digit percent ownership.

At the first startup, I was delusional enough to take a pay cut to join. I bought the whole these options will more than make up for the low salary. It went belly up after three years.

I thought I was smarter the second time. I asked for a competitive salary and actual founder shares at fractions of a penney. However, later venture capital rounds severely diluted the value of my single digit percentage founder's shares. Including the last VC round that resulted in a 335:1 reverse split. A $35M acquisition after 12 years resulted in $212.87 for me.

Tried to be smarter the third time around. I asked for a premium salary and preferred founder shares of a single digit percentage with "some" anti-dilution rights. There was still significant dilution. 7 years later I still have some reasonable ownership interest in the company, but < 1%.

I am retired and the dividends from the preferred shares helps a little. I just received the most recent quarter's dividend and the result indicates 30% growth in revenue over the last quarter. Who knows after two albatrosses and seven years this turkey may fly.

Bottom line: After 20+ years at statups. Don't consider those options as worth anything more than coarse toilet paper.

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