Options backdating which companies are at risk

Mayhar got 0.4% of a company when it was valued at M.

By the time the company was worth

Mayhar got 0.4% of a company when it was valued at $5M.By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

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Mayhar got 0.4% of a company when it was valued at $5M.

By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

One possible answer, perhaps the simplest possible answer, is that options aren’t worth what startups claim they’re worth and startups prefer options because their lack of value is less obvious than it would be with cash.

A simplistic argument that this might be the case is, if you look at the amount investors pay for a fraction of an early-stage or mid-stage startup and look at the extra cash the company would have been able to raise if they gave their employee option pool to investors, it usually isn’t enough to pay employees competitive compensation packages.

The 1x liquidation preference means that the investors will get 1x of their investment back before lowly common stock holders get anything, so the investors will get $300M for their 30% of the company.

The other 70% of equity will split $200M: your 0.1% common stock option with a $0 strike price is worth $285k (instead of the $500k you might expect it to be worth if you multiply $500M by 0.001).

Since VCs can and do diversify risk away, there’s no reason to believe that an individual employee who “invests” in startup options by working at a startup is getting a deal because of the risk involved.

B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than 0k (minus the cost of exercising his options) instead of M (minus the cost of exercising his options).

One possible answer, perhaps the simplest possible answer, is that options aren’t worth what startups claim they’re worth and startups prefer options because their lack of value is less obvious than it would be with cash.

A simplistic argument that this might be the case is, if you look at the amount investors pay for a fraction of an early-stage or mid-stage startup and look at the extra cash the company would have been able to raise if they gave their employee option pool to investors, it usually isn’t enough to pay employees competitive compensation packages.

The 1x liquidation preference means that the investors will get 1x of their investment back before lowly common stock holders get anything, so the investors will get 0M for their 30% of the company.

The other 70% of equity will split 0M: your 0.1% common stock option with a

The most common misrepresentation I see is that the company will claim that because they’re giving an option for, say, 0.1% of the company, your option is worth

Mayhar got 0.4% of a company when it was valued at $5M.By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

||

Mayhar got 0.4% of a company when it was valued at $5M.

By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

One possible answer, perhaps the simplest possible answer, is that options aren’t worth what startups claim they’re worth and startups prefer options because their lack of value is less obvious than it would be with cash.

A simplistic argument that this might be the case is, if you look at the amount investors pay for a fraction of an early-stage or mid-stage startup and look at the extra cash the company would have been able to raise if they gave their employee option pool to investors, it usually isn’t enough to pay employees competitive compensation packages.

The 1x liquidation preference means that the investors will get 1x of their investment back before lowly common stock holders get anything, so the investors will get $300M for their 30% of the company.

The other 70% of equity will split $200M: your 0.1% common stock option with a $0 strike price is worth $285k (instead of the $500k you might expect it to be worth if you multiply $500M by 0.001).

Since VCs can and do diversify risk away, there’s no reason to believe that an individual employee who “invests” in startup options by working at a startup is getting a deal because of the risk involved.

B * 0.001 =

Mayhar got 0.4% of a company when it was valued at $5M.By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

||

Mayhar got 0.4% of a company when it was valued at $5M.

By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

One possible answer, perhaps the simplest possible answer, is that options aren’t worth what startups claim they’re worth and startups prefer options because their lack of value is less obvious than it would be with cash.

A simplistic argument that this might be the case is, if you look at the amount investors pay for a fraction of an early-stage or mid-stage startup and look at the extra cash the company would have been able to raise if they gave their employee option pool to investors, it usually isn’t enough to pay employees competitive compensation packages.

The 1x liquidation preference means that the investors will get 1x of their investment back before lowly common stock holders get anything, so the investors will get $300M for their 30% of the company.

The other 70% of equity will split $200M: your 0.1% common stock option with a $0 strike price is worth $285k (instead of the $500k you might expect it to be worth if you multiply $500M by 0.001).

Since VCs can and do diversify risk away, there’s no reason to believe that an individual employee who “invests” in startup options by working at a startup is getting a deal because of the risk involved.

M.

Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income.

Moreover, even if VCs shared my risk function, because VCs hold a diversified portfolio of investments, the same options would be worth more to them than they are to me because they can diversify away downside risk much more effectively than I can.

When he left four years later, he could afford to pay the cost of exercising the options, but due to a quirk of U. tax law, he either couldn’t afford the tax bill or didn’t want to pay that cost for what was still a lottery ticket – when you exercise your options, you’re effectively taxed on the difference between the current valuation and the strike price.

Even if the company has a successful IPO for 10x as much in a few years, you’re still liable for the tax bill the year you exercise (and if the company stays private indefinitely or fails, you get nothing but a future tax deduction).

strike price is worth 5k (instead of the 0k you might expect it to be worth if you multiply 0M by 0.001).

Since VCs can and do diversify risk away, there’s no reason to believe that an individual employee who “invests” in startup options by working at a startup is getting a deal because of the risk involved.

The most common misrepresentation I see is that the company will claim that because they’re giving an option for, say, 0.1% of the company, your option is worth

The most common misrepresentation I see is that the company will claim that because they’re giving an option for, say, 0.1% of the company, your option is worth $1B * 0.001 = $1M.

Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income.

Moreover, even if VCs shared my risk function, because VCs hold a diversified portfolio of investments, the same options would be worth more to them than they are to me because they can diversify away downside risk much more effectively than I can.

When he left four years later, he could afford to pay the cost of exercising the options, but due to a quirk of U. tax law, he either couldn’t afford the tax bill or didn’t want to pay that cost for what was still a lottery ticket – when you exercise your options, you’re effectively taxed on the difference between the current valuation and the strike price.

Even if the company has a successful IPO for 10x as much in a few years, you’re still liable for the tax bill the year you exercise (and if the company stays private indefinitely or fails, you get nothing but a future tax deduction).

||

The most common misrepresentation I see is that the company will claim that because they’re giving an option for, say, 0.1% of the company, your option is worth $1B * 0.001 = $1M.Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income.Moreover, even if VCs shared my risk function, because VCs hold a diversified portfolio of investments, the same options would be worth more to them than they are to me because they can diversify away downside risk much more effectively than I can.When he left four years later, he could afford to pay the cost of exercising the options, but due to a quirk of U. tax law, he either couldn’t afford the tax bill or didn’t want to pay that cost for what was still a lottery ticket – when you exercise your options, you’re effectively taxed on the difference between the current valuation and the strike price.Even if the company has a successful IPO for 10x as much in a few years, you’re still liable for the tax bill the year you exercise (and if the company stays private indefinitely or fails, you get nothing but a future tax deduction).

B * 0.001 =

The most common misrepresentation I see is that the company will claim that because they’re giving an option for, say, 0.1% of the company, your option is worth $1B * 0.001 = $1M.

Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income.

Moreover, even if VCs shared my risk function, because VCs hold a diversified portfolio of investments, the same options would be worth more to them than they are to me because they can diversify away downside risk much more effectively than I can.

When he left four years later, he could afford to pay the cost of exercising the options, but due to a quirk of U. tax law, he either couldn’t afford the tax bill or didn’t want to pay that cost for what was still a lottery ticket – when you exercise your options, you’re effectively taxed on the difference between the current valuation and the strike price.

Even if the company has a successful IPO for 10x as much in a few years, you’re still liable for the tax bill the year you exercise (and if the company stays private indefinitely or fails, you get nothing but a future tax deduction).

||

The most common misrepresentation I see is that the company will claim that because they’re giving an option for, say, 0.1% of the company, your option is worth $1B * 0.001 = $1M.Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income.Moreover, even if VCs shared my risk function, because VCs hold a diversified portfolio of investments, the same options would be worth more to them than they are to me because they can diversify away downside risk much more effectively than I can.When he left four years later, he could afford to pay the cost of exercising the options, but due to a quirk of U. tax law, he either couldn’t afford the tax bill or didn’t want to pay that cost for what was still a lottery ticket – when you exercise your options, you’re effectively taxed on the difference between the current valuation and the strike price.Even if the company has a successful IPO for 10x as much in a few years, you’re still liable for the tax bill the year you exercise (and if the company stays private indefinitely or fails, you get nothing but a future tax deduction).

M.Like most people, extra income gives me diminishing utility, but VCs have an arguably nearly linear utility in income.Moreover, even if VCs shared my risk function, because VCs hold a diversified portfolio of investments, the same options would be worth more to them than they are to me because they can diversify away downside risk much more effectively than I can.When he left four years later, he could afford to pay the cost of exercising the options, but due to a quirk of U. tax law, he either couldn’t afford the tax bill or didn’t want to pay that cost for what was still a lottery ticket – when you exercise your options, you’re effectively taxed on the difference between the current valuation and the strike price.Even if the company has a successful IPO for 10x as much in a few years, you’re still liable for the tax bill the year you exercise (and if the company stays private indefinitely or fails, you get nothing but a future tax deduction).

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