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 »

Crowd Funding Economics – Web 3.0 Community Financing Meets Social Networks

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

CrowdfunomicsCrowd Funding Economics

Web 3.0 Community Financing meets Social Networks

Tech Trends

There’s been a huge roar building around crowdfunding and the marketing implications are clear. The democratization of accessing capital sped through Congress at a speed previously thought unachievable, led by the Crowd Fund Advisors. Crowdfunding platforms raised almost $1.5 billion in 2011, doubled to $3 billion in 2012, and is predicted to double again to $6 billion in 2013.

 

Crowdfunding can take various forms: Lending, Reward, Donation, and Equity. The forms currently legal in the US include the first three. In lending crowdfunding, funders receive interest income from their loan and expect repayment of original principal investment. In reward crowdfunding, there is a non-pecuniary benefit. Donation crowdfunding provides for not return and is purely philanthropic.

 

Equity crowdfunding allows companies to raise startup capital by selling small amounts of stock online to a large number of buyers. Read more »

May the Equity Packages Be Forever in Your Favor

Filed under: Candidate / Job Seeker, Interview, Job Search, Offers / CounterOffers, Salary

May the Equity Packages Be Forever in Your Favor

By Joseph Walker.

Joanna Bradley, IT Sales & Marketing Recruitment Manager, was interviewed for this story on evaluating opportunities at start-ups. This article was originally published on the FINS (Wall Street Journal Digital Network) website.

 

You’ve decided to join a start-up. You’ve gone through a rigorous interview selection process and have been deemed worthy of joining a small band of brothers dedicated to nothing less than ringing the Nasdaq bell and becoming millionaires many times over. Read more »