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So I joined a startup last year. They gave me 50,000 options (ISO) with the exercise price of $0.4 per share. Currently I do not how many shares the company has in total, but in the print of the agreement I saw that the Cumulative Number of Shares is roughly 10,000,0000 shares.

Lately, the company is valued around 100 million dollars. Does this mean each share is worth $10? and if I exercise my shares, I need to pay $20K and My shares will worth $500K? What should I do? Should I exercise all my shares now? Or should I wait for the company to go public (or acquired)?

I really appreciate your help. I feel I am oversimplifying things here and something is missing. And if there's any documents helping me understand these better, please feel free to share.

Thanks

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  • Is your startup privately held or has it gone public (had an IPO)?
    – shoover
    Commented Jul 14, 2022 at 23:38
  • It’s privately held
    – Jacob
    Commented Jul 15, 2022 at 0:57

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There are a few important points you should be aware of. Based on your question I am assuming that your company has not gone public yet.

  1. Yes, the nominal value of each share is $10. However this is highly speculative. It really just means that your company found some investors who were willing to bankroll the company assuming the $100 million valuation. The valuation can change a lot as the company attempts to go public. It could become a lot more, it could become a lot less.

  2. Your option agreement may restrict when you are allowed to sell your shares. Some companies simply don't allow employees to sell shares pre-IPO. If you are allowed to sell your shares pre-IPO you'll have to find your own buyers for the stock and negotiate a price with them, or go to a pre-IPO marketplace. I've never worked with a pre-IPO marketplace but my impression is that you'll need to be fairly financially savvy to avoid getting a bad deal. Some companies will sometimes set up "liquidity events" where early employees are recruited to sell their shares to new investors. You'll want to triple check with your company to see what restrictions they have on pre-IPO stock sales.

  3. When you exercise your options the difference between the strike price and their nominal value will be treated as ordinary income and you will owe taxes on it even if you don't sell the stock. If you exercise all your options you'll have a tax bill of at least 0.12*$480000=$57,600. This is why many folks don't exercise their options until right before they sell their stock: they need the stock sale to cover the tax bill for exercising the option.

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  • Also, important to remember that if you exercise and hold, you may end up with a loss. If for example, you exercise now and get a $480000 income (and pay the $57600 tax bill), but in the end the company fails and goes out of business - you end up with a $500000 loss that you'll have to spend hundreds of years of writing off in $3K per year increments unless you become rich in some other way. A lot of folks from the early 2000s dot-com bubble bust are still writing off their losses, and will continue for the rest of their lives.
    – littleadv
    Commented Jul 15, 2022 at 1:33

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