Startup employees: Here is the proper way to value your stock options
There’s a lot of angst brewing among startup types over Katie Benner’s excellent story on Good Technology in the New York Times today.
Good was about 15 years old. In its most recent incarnation, Good specialized in software for managing mobile devices. It had a variety of owners over the years, but in the last few years it raised a lot of venture capital and it filed to go public in 2014.
Then its business segment got commoditized, the IPO fell apart, and BlackBerry bought it for $425 million in September 2015. That price was well below Good’s last private valuation of $1.1 billion.
A lot of employees had stock options. Those options were worth a lot less after the sale than they thought they would be. A lot of Good’s VC investors, who held preferred shares, did OK in the sale. Some employees reportedly did not.
Worse, some of those employees exercised their options early and paid taxes on them at an older, higher value. Others bought additional shares on the private market at an older, higher value. Like Matt Levine at Bloomberg writes, Good was almost like a public company in terms of share liquidity, although not as transparent in terms of price and valuation.
Regardless, what happened at Good is a good reminder for employees working at any venture-funded private company on how to treat those stock options you’re getting.
For most employees, for the sake of your own financial planning and salary negotiations, those options should be treated as if they are worth $0. Because until you sell them, that’s what they’re worth.
But, but, but — founders don’t think that way! They just gave up a huge chunk of their last round to hire you, the hotshot engineer or brand new VP of sales. How can you say they gave up nothing? Plus, Black-Scholes and all that.
OK, technically, by some measures, those options are worth more than $0.
But you have to discount for risk. And startup stock options are an incredibly risky asset.
Most startups fail. A lot of times, the failure is out of any individual’s control. Maybe you’ll never find product-market fit. Maybe your founders or board are incompetent, or will make one fateful decision that will doom the whole company. Maybe your CEO will get indicted. Maybe the financial markets will collapse just when you were ready to ramp up and go global. Maybe Facebook is going to do your idea better, faster. Or maybe the startup down the street will.
Rules of the game
Venture capitalists and late-stage investors are finance professionals. They understand how to protect themselves against risk. And when they are fronting money to your company so you can grow or stay in business, they are going to exact as many concessions as they can to protect their downside.
If you’re a startup employee, you’re probably not a financial professional, and you probably don’t have the same level of access to your company’s financial records or cap tables to know the full extent of those risks, nor the power to negotiate the same kinds of protections.
Even if you’re able to get out before a liquidity event, you might not be able to sell your shares for what you thought they were worth. At Uber, for instance, the company apparently forces employees to sell shares back to Uber at a preset price.
The point of all this?
Don’t work at a startup because you want to get rich, as the eponymous VC (we think?) bloggerStartup L Jackson so eloquently put it earlier today. If you want to get rich, negotiate the maximum salary at the biggest, fastest-growing public tech company you can find, like Google or Facebook or Apple. Sell your shares as they vest, diversify your portfolio, and enjoy your retirement.
But if the idea of working for a big bureaucratic company makes you shudder, if you’re a rebel or a dreamer with a vision of doing things better, if you want to do a lot of jobs and get a lot of experience really fast, if you want to work incredibly hard so you can look back someday with pride and say “I built that,” then maybe a startup’s right for you.