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Comment by bpodgursky | Hacker News Reader

According to crunchbase, they raised money at a $3.25B valuation in 2012.

If they are IPOing at $2.66B now, that means a lot of stock options granted in-between are going to be worthless, unless they were granted at some very different price...

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Yes, Square's private per share prices:

Series A: $0.21627

Series B: <$1

Series C: $5.79817

Series D: $11.014

Series E: $15.46345

IPO @ $9 is not great for lots of folks, but mostly late-stage employees (assuming D & E investors have a liquidation preference - though I don't know for sure).

Series E investors got a ratchet guaranteeing $18.56 per share: http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and...

what about the common? i think that was the gist of the comment...do the ESOPs pay out in preferred?

edit: below comment mentions using comp rsus

Strike prices on common are almost always far far below what investors are paying for preferred shares.

I thought they were priced at the last round price (which is usually a discount if you interpolate the prce between rounds)

Nah, there's a big discount because preferred shares have downside protection (as well as a few other valuable things general) so common stock is valued lower. Generally a 70% discount or so.

the discount varies by investment round. common shares for early stage companies come with a huge discount. or perhaps it is clearer to say that preferred shares come with a huge premium primarily because the liquidation preference (LP) is so valuable at that stage). preferred shares in later rounds have a much lower premium, because investors don't value the LP as much.

I've had this happen, and it's wrong. The price must be adjusted based on the terms. Common stock has basically no terms, so strike price should be much, much lower than what investors are paying for preferred.

This is for preferred stock though, not for common stock. Employee options would be priced to common stock.

Just went through an IPO and we had a stock split to bring the price down to a number around $14. Square could also be doing a split so that $9 doesn't mean D & E are getting screwed.

That's not how stock splits work. You can't somehow subvert a falling valuation just by creating more shares.

a stock split doesn't account for the lower total evaluation.

The stock options priced is based on the 409a valuation, not on what investors paid in the last round, so they might not be worthless.

what is a normal ratio between the two?

Depends on the stage. Early stages the difference can be 1000-10x. Later stages the difference is much less, 10-1x but usually by then companies start issuing RSU's not options.

RSU's are stock given with the current valuation (eg. you get 10,000 shares, which are worth of $1M with the current valuation). If the company IPO with that valuation, you get ($1M - taxes). If they IPO with less or more, you get less or more.

Difference is that with options you actually have to exercise (buy the stock) with the given strike price.

It depends on the state of the company. In the beginning, the share price between common (employee) and preferred (investor) stock can be very significant (10x or more), but as the company gets closer to IPO, the value between common and preferred stock converges to 1. Some unicorns get around this issue by issuing RSUs that retain some value even if the share price drops.

It can range quite a bit, but you can figure around the 25 - 35% range as a rough estimate for most venture backed companies. Companies that are near-to or are already cash flow positive can move the needle higher.

The S-1 contains a table with number of options granted as well as strike price on various dates since June 20, 2014. Some other data can be determined from the option grants for executives. Here's a rough list:

  Date               Strike ($)
  ==============================
  July 25, 2012       2.73
  May 31, 2013        2.90
  August 27, 2013     3.33
  February 27, 2014   7.25
  June 20, 2014       8.23
  August 16, 2014     9.11
  December 17, 2014  10.06
  March 20, 2015     11.28
  May 14, 2015       13.09
  June 17, 2015      13.94
  July 9, 2015       14.81
  August 11, 2015    15.25
  September 16, 2015 15.39

They'd be smart to hand out some heavy cash bonuses to employees that have been dreaming about $20 per share for years.

Why? The investors get an exit, Jack can cash in his shares, and the general public can inherit the rest. In the near term there will probably be layoffs, as soon as Wall Street realizes that the company had no real direction or traction that can support a multi billion dollar valuation.

Jack can't cash his shares. At least not for a long time.

In my experience incentive stock options that companies give to employees normally are heavily discounted.

It is a bit more nuanced than that. Employees are given options for Common shares rather than preferred shares. Since preferred have voting rights and other perks (like liquidation preferences) they are worth more than common. The value of common stock is determined by a 409a evaluation which takes a lot of different factors into account, but it is not unusual for Common shares to be valued at 1/10th the value of preferred shares.

From my experience it's hard to discount more than ~70% or the IRS starts to complain.

That, plus they've probably been granting RSUs for a while, which do not require being exercised and which cannot be underwater,

Square was granting options as recently as 2-3 months ago for senior eng roles, I don't think many people at Square are hanging on to RSUs.

While they cannot be underwater, they were granted with a target comp in mind and a low enough IPO can put people well below the targeted value.

Sure. I think that's fine; as long as people aren't losing money on taxes or exercise price.

Equity compensation should always be viewed with the appropriate grain of salt—it's an investment, and most likely won't pan out. When the company kills it (Facebook, Apple), it turns everyone into millionaires. Square isn't there yet, though I'm sure a lot of people will have some very nice "bonuses" out of this.

I wouldn't underestimate, if nothing else, the mental impact of being sold on a company with a major piece of comp being RSUs at a price, almost certainly derived from the last round raised, that are then worth a lot less. Obviously nobody will be out-of-pocket on them, but they got a salary much less than they were sold on. This can't work wonders for retention, and makes golden handcuffs more like paper handcuffs.

It's probable the internal, common valuation was much less.

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