Ask HN: Why does % of ownership matters more than number of stock options | Hacker News Reader

Ask HN: Why does % of ownership matters more than number of stock options

6 pointsquietthrow5 comments

I recently got my stock option grant letter and to make some sense of what I could potentially be getting I simply took the number of options and multiplied it with a reasonable sales price and then subtracted my total cost (number of options * strike price). Upon looking up on the internet, I found numerous articles indicating that 'the only number that matters when it comes to stock options is what % of company you own. I dont understand why % of ownership matters more than number of options I have. Because with the latter its very simple...num of options * sale prices...% of ownership it seems like complicates things unnecessarily. Can somebody explain what I am missing??

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Your method works if you know $/share of the sale price.

People generally don't know the $/share. Let's take the case where you only know the company valuation and the number of shares you have.

Eg: You know a company sold for $30MM and that you have 1MM shares. How much are your shares worth ?

Unless you know the outstanding shares you don't know if the price/share is $15/share (2MM Outstanding) or $3/share (10MM Outstanding) or some other number. In this case your portion could be worth 15MM or 3MM depending on the number of shares outstanding.

The percentage ownership lets you calculate the value of your shares directly through simple multiplication ie. your %ownership * Sales Price = Your Portion's Value

It also tells you number of shares outstanding. You can divide the number of your shares by your percentage to get shares outstanding.

I see. So is there a reason why a company might not disclose its sale price per share? I ask because the fact that a lot of people say you must know the ownership % implies that you will not know the sales price - which to me seems impossible. Basically there is two positive outcomes for which the original question is relevant. 1) the company get bought out by another company and 2) the company goes for IPO

In case 1, the purchasing company will be buying all the shares outstanding which includes employee stock options. Since I have the option and will be the beneficiary of the event by virtue of getting the capital gains which in turn will tell me the sales price (albeit after the fact), whats the benefit to the company by not dislcosing the price?

In case 2. I will know the sale price because it market price of when I exercise my options.

So with the above logic...So is there a reason why a company might not disclose its sale price per share?

After the transaction you will definitely know - for the reasons you mention and b/c uncle sam wants some of your recent gains.

The issue that people are generally raising is that sometimes unscrupulous characters try to impress naive candidates with job offers that only have the number of shares -- "You should sign today b/c you get XX MM shares.." which sounds great but could mean that you just accepted a worthless offer depending on shares outstanding.

It's not that it won't disclose the sale price per share - it's that at the time you join the company, the sale hasn't happened yet, and nobody can predict the future. Knowing the sale price X years in the future, when and if the company actually gets sold or IPOs, doesn't help you evaluate the company now.

The value of understanding your % ownership is that you can do your own math on what potential sale prices are likely and then see if it ends up being personally worthwhile to you in those scenarios. The company's quite capable of picking an arbitrary sale price and then doing the math to tell you what the sale price per share is - but given that they have a vested interest in hiring you for the lowest stock grant possible, they will probably pick the highest conceivable offer and then divide that by the number of shares currently outstanding (ignoring dilution), because they can't predict the future any more than you can and, when asked to make things up, are under no obligation to make things up that are more favorable to you than them.

There's a difference in options and shares. Option value is based on lots of things like strike price, time to maturity, volatility and price of the underlying stock,etc. If a stock is 100% guaranteed never to exceed the strike price its options are worthless. If no one can buy the option from you it is worth significantly less. Many startups give options that are so far out of the money they are worthless. They will give you Options on 10k shares that you'll never be able to exercise so it may as well be 100k.

Options don't represent an equity position in the company. Percent of the company is meaningless anyway because companies will never give more than a small fraction of a percent.

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