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Ask HN: Should I be told a startup's present valuation when given stock options?

27 points by quickpost ↗ HN
I was recently given a set of stock options that vest over the next 4 years as part of my compensation working for a startup. Since the founders didn't tell me either the present valuation of the company or the # of outstanding shares, I feel like I have no way to effectively determine if these stock options will be worth anything, ever.<p>The only information I have is the strike price, which doesn't tell me a whole lot. Is this common practice in startups with less than 20 employees? What are you experiences?

33 comments

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pg
Anyone getting stock from a startup should know what percentage of the (fully diluted) company it is.
quickpost
That's exactly the response I was looking for - Thanks!
borism
Yes, but how to ask that kind of thing politely?

I would imagine it's pretty rude to ask "so how many percent of your company are you giving me?" at your first interview, no?

megaduck
You should ask about it when they offer you the stock. Any earlier, and you're being presumptuous.

Stock is impossible to value without knowing the percentage of ownership. Since this usually comes up when you're negotiating compensation, it's appropriate to ask at that time.

tptacek
There is absolutely nothing impolite about asking this question. You don't need to be delicate. It's morally equivalent to asking whether your salary is denominated CDN or USD.
bps4484
that's a great analogy. If the person giving you the offer acts offended you ask such a question, you may want to question working there. Being able to discuss compensation openly is (in my opinion) extremely important for any job.
borism
I don't think it is great analogy. You're comparing fiat money to illiquid hard-to-value startup shares that have a high probability of being worth 0 in relatively short term.
tptacek
This question comes up all the time here. There's a very simple answer: Yes. If equity is a significant part of your compensation, you need to be informed of how to value it.

Here are all the caveats and wrinkles I can think of:

* Ownership percentages are deceptive. If you're an employee (meaning: you start with a steady salary), 1% is a big number. With 19 employees preceding you, you're probably not getting 1%. After funding, the founders may be only high single digits themselves.

* 90% of 0 is 0. You need to be asking questions about how equity might become worth something. This isn't as hard a conversation as you may think it is. Startups often sell for rule-of-thumb multiples of revenue. Ask: two years from now, what's the top line revenue of the company going to be? Will the market value the company at 2x that revenue (a consulting company multiple), 4x (a product company), or 8x (a product in a red-hot market)? Take all the numbers you get and work back what the company is saying you might make if the company gets bought, and then scale it by the likelihood that any private company gets bought favorably. Otherwise, all the "percentage" you get is is a point score for your ego.

* (most importantly) Even if you know what the shares are worth today, you don't in fact know anything about what they're worth by the time they become liquid. That's because every single financing event in the company will reallocate ownership. Every round of funding is going to impact them. In extreme but not (unfortunately) rare cases, your shares can be worth nothing even in a tens-of-millions-of-dollars acquisition --- this goes double if you leave the company before the liquidity event. A company with a stock plan and 20 employees has spent a lot of money on legal to ensure that you have no rights.

I just got back from a huge industry convention in San Francisco, and after talking to a lot of friends there, I've come to this conclusion: tech people are unbelievably awful negotiators. Let me make a suggestion. Do what you'd do if you were buying a car. Negotiate the value of the transaction in an objective currency: dollars. Then, when the company tries to "finance" the deal in shares, you at least know the dollar value they're trying to assign to the shares.

nazgulnarsil
After funding, the founders may be only high single digits themselves.

wow, this is normal? I guess when you're playing flip-lottery you don't care.

tptacek
4 equal cofounders + an employee pool, pre-funding, and you're already in low double digits. Now give half the company to financiers. Twice.
pg
Fred Wilson's post on this is the best source: http://www.avc.com/a_vc/2009/02/founder-dilution-how-much-is...

If by "flip" you mean sell the company quickly, it would actually be a different story. VCs wouldn't fund you if that was what you wanted to do, so if you raised money it would be a smaller amount, from angels, and there would be much less dilution.

nazgulnarsil
10-20% doesn't sound nearly as bad as single digits. partially psychological I suppose.
netcan
The post suggests 20%/25%/60% for founders/management team/investors is a typical outcome. I assume that employees take their share from the 25% management and that it typically isn't very big.

It would be interesting to know what an average employee stock option at a start-up is ultimately worth discounted to the time when it's earned.

pg
That kind of split is what you'd get if a company became really big. So it's more an ideal outcome than a typical one.
samt
Also find out whatever you can about the current cap table. A cap table will tell you a lot about the history of the company any demons hiding in the closet that might prevent a buyout or later stage investment in the company. If say, a pool of 30 dentists owns 30% of the preferred stock with a 3x liquidation preference, run and run fast.
tptacek
While it's hard to reasonably argue that employees shouldn't know the valuation of their own equity, it's easier to argue that the cap table isn't any of their business. More information is usually better, but I might not push too hard on the terms of everyone else's shares.

Liquidation preference is an important one to know, and it's easy to make a case for it: when you're discussing valuation during negotiation (and you need to), and you get to the part about what the numbers look like if you're bought when doing $xMM/yr, you get to ask "how much of that number will VC take off the table?"

netcan
I think this highlights how strange the practice of employee stock is. If you were receiving the money as salary from your startup and investing it in another with the terms/information available to you, it would seem mad.

Do you know what percentage of one's salary is typically considered to be stock?

samt
Yeah, like everything else here what you can reasonable ask for depends on company stage. It's not unreasonable for employees 2-10, say, to ask for a general characterization of the cap table and liquidation preferences.
tyrelb
You should know at minimum the current value of the shares (i.e. last funding round price) and the number of shares + options outstanding.

Options are also horrible - unless you have some agreement which allows you to exercise them upon a liquidity event (i.e. buy-out, IPO). Get shares vs. options when given a chance.

tptacek
I've never even heard of an employee managing to negotiate the structure of their equity grant. It's not unusual for your hiring manager --- even if they're a founder --- to have their hands tied on the number of shares you're getting, let alone the vesting or the vehicle; those are board decisions.

Shares vs. options may also not be a meaningful distinction. Any equity plan that has seen a lawyer has been scrubbed so that employees have no rights. If you "own" shares in a funded company, the odds are strong that they can be taken back from you (or devalued totally) at the whim of the board.

The place where the company probably has the most negotiating flexibility is US dollars. Employees get hired for wildly different salaries. Don't waste time bickering about options vs. shares: spend your time getting the dollar number up.

portman
In the US, if you are given shares of a company when you join, you must pay taxes on those shares.

Let's say the startup is currently valued at $5M, and you are given shares for 1%. You need to write a check to the IRS for your share of $50,000 in income.

Alternatively, if you are give the equivalent number of options, you do not have any tax liability until you exercise those options.

This is one reason (of many reasons) why it is almost unheard of for a startup to grant employees shares instead of options.

tptacek
Restricted stock is common in startups (there are company structures that may require it). Vesting structure and 83(b) elections also matter. Expecting 'grellas to offer a much more coherent explanation momentarily.
krav
If they won't give you this information, ask yourself if these are the type of founders you want to work with?
tptacek
They might be. You don't need a license in startupology to start a good company. Some people think (erroneously) that it's bad to have people talking about company numbers. Conversely, there are some m-teams that are extremely "open" about numbers and valuations that will, in the end, totally screw over everyone on the team. When it comes to startup equity, let me say it again: you have no rights. The exceptions to that bald assertion tend to prove the rule.

Are you doing what you love? Do you like the people you work for? Is the company thriving? Each of those questions is probably more important to your outcome than your "percentage".

johnrob
Equally important is the reverse question: if a prospective employee doesn't demand this information, should I hire him?
tptacek
The answer to this question has absolutely nothing whatsoever to do with how well anybody but a salesperson will do in your company.
Flemlord
You'd be surprised how many people don't ask questions about their stock options. In my experience, at the senior management level only 20% or so really ask the right kind of questions. Below that, it's <5%.

In fact, the people who asked the right kind of questions did not end up being top performers. I actually think there may be an inverse relationship between stock-option queries/demands and performance. Or maybe I'm disproportionately remembering the more demanding employees who didn't perform well.

tsuraan
You would honestly rate a programmer based on his knowledge of business finances? That seems more than a little mad.
johnrob
It just seems incredibly irrational to accept not knowing very important details. In reality, I'm sure many smart people ignore these details. It amazes me that they accept "you can have a piece of the pie" without asking "how much of the pie?".
quickpost
I agree - which is exactly why I'm asking this community for feedback before I make this demand first thing Monday morning. :)
tsuraan
I guess that's a valid point of view. For me, I have an interesting job with some hypothetical equity. I don't know its supposed value, and quite possibly never will. It's not something I stress about, but if it someday becomes valuable, it will be an unexpected surprise. I'd hate to think of not getting a job based off that point of view :) Of course, I've always seen stocks as a funny form of gambling, so that might skew my views a bit.
chrisbennet
If they expect you to work harder because you have equity, then yes, you definately have a right to know what you are getting in return for your extra work.

In reality: (A) The chances of your company ever having a "liquidity event" are slim. (B) Even if it did, your share of the windfall would probably be less (per hour of overtime) than if you just worked at a "normal" job.

If you accept the above, what your equity is worth becomes somewhat irrelevant. You better be doing it because you love the work.