Startup job offer cheatsheet
Got an offer in hand? Don’t know how to evaluate what it means? Don’t want to get screwed over? I prepared a list of things you should know in order to determine the true worth of those options. These apply to ISOs, which are the options that are generally used at startups.
This will be a dense post, as I ain’t got time to write prose. Google it if you don’t get it.
Outstanding shares
The most important number is number of outstanding shares. This can vary greatly, depending on how the company is structured.
Divide the number of shares you are being offered by the total number of outstanding shares. That’s the percentage of the company you can get if you stay the entire time.
Note: as part of the offer, ask them for the exact day that you will be given the option contract. Ask if there are any splits coming up. Whatever you do, do not wait on getting your options contract when you join. Getting the same number of shares after a stock split can mean a 2–10x difference in payout. I’ve seen it happen before. Multiple times.
Look at comparables
Look at public and private companies in the industry. How have they exited? What’s the end game? Pick a reasonable number, now multiply your percentage by that number. Now you have an optimistic payout estimate.
Repurchase rights
What happens if you leave the company? If you have exercised stock, is it subject to repurchasing? Skype and the private equity firm Silver Lake had a notorious case where employees were given a check for their original strike prices when they left the company due to repurchase rights.
Ask about preferred vs common stock
What’s the difference between preferred and common stock? Preferred is usually for investors and common is for employees. The number of outstanding shares might be correctly stated by the company, but preferred shares can have multiple participation, meaning upon liquidity preferred shares turn into more than one common share. This kind of investor right can mess up your expected payout math.
Liquidation preference.
If the company underperforms, investors get paid back first. What is “underperforming?” Depends on how funding was structured.
Strike price
Strike price is covered by others. However, a sometimes unrealized consequence of a high strike price is that it can prevent you from leaving and going to your next thing. Usually, if you decide to leave, you must exercise the stock in thirty days or forfeit it usually.
In cases where the stock is not yet public and thus cannot be sold, you can find yourself either forfeiting the gains in your vested shares (because you have to leave and can’t afford to exercise your options) or putting a bunch of your money into an illiquid high risk investment in order to have your freedom.
Think about how your financial situation works out with the strike price that you will be paying. If you can’t comfortably afford the strike price, are you willing to wait until ipo or acquisition to get paid out?
Alternative minimum tax
Alternative minimum tax. Look it up. Assuming the shares go above your starting basis, can you pay the immediate AMT Tax hit? If you can’t you are in the same situation as those with a high strike price that cannot leave.
Thats all I got. Negotiate safely!
