I have a friend that is being issued 10k shares over a period of 3 years at a valuation of $70B. The company recently raised $17M in funding and it is a very early stage startup. The strike price is $0.01. Can someone help me understand what this means? What are the pros and cons of accepting it?
Edit: The total number of shares will be limited to 607,500,000
To calculate your gross $ value today, you need to know your # of shares (10K) divided by total fully diluted outstanding shares (607,500,000) multiplied by the valuation (probably $70M).
Strike price is your cost to exercise the options, which should be deducted from your gross value. You will likely also incur taxes unless you exercise right away via 83B election
Only 10K shares feels very low though if there are really 607M outstanding shares (seems too high). It's Seed-Series A, your friend should be getting at least 0.1% even as a junior IC: : https://topstartups.io/startup-salary-equity-database/
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*) might be below today's market, but still not something a pre-seed startup could pay their employees.
The shares are a lottery ticket at best unless you have conviction in the companies ability to succeed and become more valuable overtime.
So <0.018% of 607 million.
At a company exit at $6 billion (very unlikely), the shares would be worth about $120,000.
For perspective Twitter went public at $14 billion and Google at $23 billion.
So a Google size IPO would be less than half a million dollars.
That’s without additional dilution, liquidation preferences for preferred stock, and getting fired to increase returns for those first in line.
And less exercise price.
And capital gains taxes.
It’s not a bullshit offer, because the company hopes your friend believes in it.
That makes it horseshit.
Good luck.
The important takeaway is the offer is a tell.
The founders are giving fair warning that they do not want your friend to get rich.
That’s different from not caring if your friend gets rich.
Quite different from being happy if your friend gets rich.
And the polar end of the goodwill spectrum from trying to make your friend rich.
Also important to note is the tax treatment of these shares. Depending on the jurisdiction, it's possible that he would be taxed on the value of these shares when they are exercised, and not when they are sold. In the example above, that would mean that he would owe taxes on $7M whenever they were exercised.
Check out something like https://smartasset.com/investing/how-do-stock-options-work or https://www.holloway.com/g/equity-compensation for more info. (I just found these by googling [guide to stock option compensation].)
They would get 0, you aren't accounting for seniority.
As far as I know, early-stage companies don't put an upper cap on the number of shares that can exist in the future. Is this some sort of crypto company?
* Almost any pre-IPO company is going to eventually issue more shares. (Post-IPO, too.) This will dilute existing stock and option grants. Typically companies do refresher grants when this happens—to employees who are still present and performing. Unless it's in your employment contract, you are not entitled to automatic compensation for your existing shares when this happens. The board could issue another 50 billion shares tomorrow and give them all to other people.
* Private valuations are often fairy tales; it's very common to see these slashed in half or more overnight, especially in a business environment where a company needs to keep raising cash. Companies that are undervalued at the $70B level are few and far between—there's a reason we call them "unicorns."
Your friend should 100% talk to a lawyer (not an accountant) about potential taxes. It'll probably cost about $2-4,000 and could save them 100x that much.
> it is a very early stage startup.
One of these does not fit.
At 70M the calculus is much different.
Price per share also has tax implications.
Strike price means they will have to pay 0.01 per share or $100 total for the stock, which is largely irrelevant.
For example, If only 20k shares have been issued, they will have to pay income taxes on 35B over 3 years.
Is 70B the valuation they are being offered stock at or what the 17m investors payed?
https://carta.com/blog/equity-101-exercising-and-taxes/
https://secfi.com/learn/exercise-stock-options-tax-implicati...