Hacker News Reader

Comment by not_that_noob | Hacker News Reader

This is a double whammy for employees - not only is the IPO valuation lower than the prior round, their stake is being diluted in the process. Definitely not a win for them.

View on HN

God it would suck to have joined fairly recently, if you were banking on the options being worth anything. You have to wait to vest, your stock options are possibly underwater (depending on the 409a), even your vested options are going to be locked up for quite awhile, and on top of it all you're getting diluted.

After the lockup expires, you'd better hope to your lucky stars that the earnings have been good, because those first few earnings are tough, and can sink the stock price. And then on top of that, there are probably very specific windows that you can sell your stock inside of, so you have to hope to time the ups-and-downs just right.

Lots of ways for that to bite you in the ass. I have friends who had this all line up the wrong way as Twitter employees who joined a year or so before they IPOed, and currently that stock isn't worth exercising.

That's kind of the point though. Options are (at least intended to be) compensation for a lower than market salary and a risk that the company might go bust. At the point that you're raising a Series E round you are going to be paying market salaries and have enough cash that the chance of going out of business is very low. At this point you'd expect options to behave more like RSUs in a public company where the reward is for creating value as opposed to being a payoff for taking risk or investing your time.

That's a fair point, assuming you hold strong on getting your market salary. Obviously the company is going to hold strong on their "OMG we're giving you gold" stance, but if nothing else there's at least a lot more wiggle-room on salary.

I agree that the risk is lower, but the RSU analogy is imperfect because the value of the underlying stock is the same for all holders. In this case, one class of holders - the senior investors - will get more of the value, and this value is taken away from other holders who thought they had more. If Larry's stock value went up when employees and GOOG went down, there would be pitchforks out in M View.

example: Mark Pincus, who is everything wrong with the valley. He skipped the ipo lockup, selling a ton of shares at $13.96, and a bunch more at $12. If you were one of the suckers who worked for him but wasn't let out of the lockup, the best price you ever saw was $6 or so. That said, lay down with dogs, get up with fleas...

http://www.reuters.com/article/2014/11/17/us-zynga-lawsuit-r...

What does "their stake is being diluted in the process" mean specifically in this case? What exactly is getting diluted (does the issuance of extra shares to make up for the lower IPO price constitute dilution, or is it something else)?

Yes exactly. You thought you owned 1%, and all of a sudden you realize you owned 0.9%. And now that's 0.9% at a lower valuation, so you got screwed twice.

How does this actually work - are they actually creating more shares to give to the investors that bought in with this stipulation? Or are these shares coming from some pre-existing pool? I'm admittedly quite unfamiliar with this stuff, so I'm curious how the 'dilution' occurs.

This blog post provides decent summary of preferred stock impact on Employee stock.

STARTUP NEGOTIATIONS: HOW PREFERRED STOCK MAKES EMPLOYEE STOCK LESS VALUABLE http://stockoptioncounsel.com/blog/negotiating-equity-what-i...

Reply on news.ycombinator.com