A Beginner’s Guide to Startup Options & Equity

Filed under: Industry Info, Jobs/Employment, Offers / CounterOffers, Redfish Speaks

A Beginner’s Guide to Startup Options & Equity

By: Jon Piggins, VP Business Development 

Redfish Technology

 

A Beginner’s Guide to Startup Options & Equity

In the startup world, most offers of employment include stock “options”, essentially granting you the right to buy shares of the company’s stock in the future at a predetermined price. For example (in a best case, simplified scenario), you accept an offer to work at “XYZ Company”, stay there more than 4 years (to fully “vest” 100% of your options). The “strike price” for your options is $2/share. In year 5, XYZ Company decides to issue an “Initial Public Offering” to begin selling shares of their company to investment banks & the general public. They price their stock at $20/share and it begins trading on the open market (e. “NASDAQ”, where the price will fluctuate based on demand). You now have the right to “exercise” your options, buying them at the predetermined $2/share and then sell them at the market price of $20/share, giving you a gross profit of $18/share.

 

So now that we have a basic understanding of what an option is, we’ll look at a few more important considerations when evaluating your offer (or current position).

 

Valuation

While a company is private, it’s valuation is managed by the board of directors (via a “409A Appraisal”) usually one a year (or if there’s a significant change, like a new VC round of funding). The valuation is based on a number of factors, but is intended to be an independent/objective Fair Market Value, or “FMV” (think of a house appraisal). Each round of valuation, in principal, represents an increase in the value of each share in the company. So, each increase in value also means that the cost per share in that company goes up. Meaning, if you started employment at XYZ Company when they were valued at $5 Million and your “strike price” was $2/share and now the company is valued at $10 Million and new hire would now have to pay $4/share for the same option. Hence, the benefit of “early equity”…getting in while the cost to exercise (“purchase”) your options is low (as it allows for more potential profit margin).

 

Calculations
In simple terms, you can come up with a rough value for your shares by using the following equations (and a company should be able to provide you with this information once you get to the offer stage).

 

% of “ownership”, how much your potential shares represent of all the company’s outstanding shares:
# of shares/options, divided by “total number of shares outstanding” = % of equity you’d have in the company. (eg. your # of shares/options of 50,000, divided by the total number of outstanding shares for the company of 10,000,000 = 0.005 or .5% equity in the company).

 

Value (on paper) of your shares/options:
# of shares/options x current FMV strike price – # of shares/options x your strike price = your current spread or profit margin. (eg. 10,000 shares at the last Board of Director’s FMV of $10/share – your 10,000 shares/options x your strike price of $5/share = $50,000 in a “paper” gross profit).

 

 

Vesting Schedule

This is simply the rate at which you gain the ability to purchase your options/shares. Industry standard is 4 years, the 1st year vesting (25%) after one year of employment and the remaining 75% vesting each month at a rate of 1/48 over the remaining 3yrs. After 4 years, you now own the right to exercise (“buy”) all of your options.

 

 

Liquidity Preference

Venture Capitalists & other investors get paid 1st. So, if a company has taken $40 million in funding and it decides to go public, no one else but the investors get paid until the proceeds exceed the $40M+ mark. Important to note (from an equity standpoint) when looking at a company that’s taken on a lot of funding & doesn’t have good traction, as there’s a good chance you’ll probably never realize any benefit from your options.

 

 

Summary

This is meant to be a very high level “Options 101” review of the topic. There are a multitude of factors that can come into play; dilution of shares/equity, different classes of stock, company acquisition, Restricted Stock Units (“RSU’s) vs. Options…but our hope is that a basic understanding of what options are & how you can calculate a rough valuation of a company and what your options represent in “ownership” of that company, you’ll be able to better evaluate your next (or current) opportunity. We’d be happy to answer any questions or do a deeper dive on these (or other) topics, so contact us if we can be of service!

Crowdfunding to Double: The industry is booming, creating jobs, leveraging sales

Filed under: High Tech / IT / Software, Industry Info, Jobs/Employment

Crowdfunding to Double

The industry is booming, creating jobs, leveraging salesCrowd Funding

 

The crowdfunding industry is booming. More than 1,250 online platforms worldwide raising $16.2 billion last year, up 167% from 2013, according to crowdfunding research firm Massolution. And global crowdfunding is projected to reach $33-34 billion in 2015, with $6 billion of that in the US, double that of last year.

 

The benefits to companies go beyond the actual funds raised through the revenues that are crowd funded; there is a marketing benefit that translates into sales. Crowdfunded companies (via rewards, equity or debt) increased quarterly revenues by Read more »

Tech Trends: Cyber Crime & Internet/Email Security Costs & Solutions

Filed under: High Tech / IT / Software, Industry Info, Tech Trends

Tech Trends:

Cyber Crime & Internet/Email Security Costs & SolutionsID fraud

 

The tenth annual 2015 Cost of Data Breach Study, conducted by Ponemon Institute and sponsored by IBM, reports that the average cost for each lost or stolen record with sensitive or confidential information as grown from $201 to $217, and the average cost paid by companies located in the U.S. has gone from $5.9 million to $6.5 million. That is an 11% increase in the total cost of data breach, and there has been an 8% increase in the cost per lost or stolen record. 49% of data breach incidents are malicious or criminal attacks, 19% caused by negligent employees, and 32% result from Read more »

The Tech Market in a Nut Shell – Trends & Numbers

Filed under: High Tech / IT / Software, Industry Info, Jobs/Employment

The Tech Market in a Nut ShellTech Numbers

Tech Sector Employment Trends & Numbers

Employment

 

The U.S. tech industry totaled 6.5 million employees at the end of 2014 according to CompTIA’s Cyberstates report. The top five states by tech industry employment are: California, Texas, New York, Florida, and Massachusetts.

 

Payroll / GDP

 

The tech industry’s impact on the U.S. GDP is 7.1%. Tech salaries tend to be double Read more »

Tech Trends: Tech salaries leading the way overall, but not so much for women.

Filed under: Compensation, High Tech / IT / Software, Industry Info, Tech Trends

Tech Trends:

Tech salaries leading the way overall, but not so much for women.Women small presence in tech

 

Technology professionals have higher salaries overall

 

In San Francisco, which is a leading are for top pay in tech, health care, and finance, even for new grads the pay is rising faster than other areas. Annual full-time salaries in San Francisco increased by an average of 2.8% from the first quarter of 2014 to 2015, whereas nationally the increase was only 1.8% during the same time.

 

Glassdoor’s top three highest-paying positions in the City are all in tech Read more »

Tech Trends: Data Security

Filed under: High Tech / IT / Software, Industry Info, Tech Trends

Tech Trends:

Data SecurityData Target

An exciting billion dollar sector with bleeding-edge technology and amazing career opportunities.

 

Data Security is a billion dollar issue. There’s never a shortage of date breaches and compromises, hacks and mistakes in the news. As technology permeates every nook and cranny of our lives, and devices become further interconnected, and more and more data about every aspect of consumers is stockpiled, the risks of that data being exploited malevolently multiply.

 

Web business have been especially hard-hit: Ebay was hacked and had 145,000,000 records stolen this year Read more »

Redfish Technology Snags Place in Top Ten “Best Places to Work”

Filed under: Community Service, Industry Info, Stimulating Ideas

Redfish on the #BPTW List for the Third Year Running

Best Places to Work 2015

POPULUS has named Redfish Technology among the top ten Best Places to Work in Idaho for the third year in a row. The award is given for the company’s efforts and commitment to creating engaging workplaces.

 

Redfish Technology is thrilled to announce it has been honored as a ‘Best Places to Work’ in Idaho honoree for the third year running. In 2013 and 2014, Redfish won first place in the micro employer category. On April 16, the rankings for 2015 will be revealed, stay tuned to see if Redfish makes it to #1 for a third year!

 

Being honored as a BPTW company is important because the recognition attests to a company’s commitment to its staff, customers, and community. “We truly care about our Redfish family and our community,” affirms Heidi Clark Read more »

Tech Salary Trends: Salaries Continue to Rise, Especially in Key Sectors, for Key Skills

Filed under: Compensation, High Tech / IT / Software, Industry Info, Tech Trends

Tech Salary Trends

Salaries Continue to Rise, Especially in Key Sectors, for Key SkillsBig Data Skills

 

There’s great news in the tech industry as far as salaries go! US Tech Salaries and Bonuses are on the rise. The latest Dice Salary Survey reports a 2% annual salary increase over last year on average. Bonuses were also up for 37% of tech professionals, with a $9,538 bonus on average. Over the last five years, average tech salaries have grown each year – 2010: 0.7%, 2011: 2.4%, 2012: 5.3%, 2013: 2.6%, Read more »

Top Certifications for 2015: Security, Business, Networking, Software/Hardware

Filed under: High Tech / IT / Software, Industry Info, Tech Trends

Top Certifications for 2015

Security, Business, Networking, Software/HardwareIT PRO Certification

 

Tech skills and certifications are important for all roles from the engineering side to project management. There are several recent surveys that highlight the certifications that are most in demand or that provide the best pay off. This article highlights a few of those surveys (with links to them) as well as discussed general skills trends that Redfish Technology has identified.

 

According to the UCLA Extension, tech certifications that make the most impact on your career and pay scale are the Microsoft Certified IT Professional, and the Cisco Certified Network Associate. A+, Server+, ACMT are the top hardware/software certifications requested in IT job postings.

 

The IT professionals merit badge is Read more »