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My partner got this stock option offer and I would deeply appreciate your advice on what it means. Is this a standard offer? Where on the spectrum of stock offers does this stand? The company is a startup.

"Stock Options. It will be recommended to the Company’s Board of Directors that you be granted an option to purchase 255,010 shares of the Company’s Common Stock at the fair market value on the date of the grant. All of these options will vest over four years, commencing on your first day of employment with the Company (the “Vesting Commencement Date”). 25% shall vest on the one year anniversary of the Vesting Commencement Date and the remaining options shall vest in equal monthly installments over the 36 months thereafter. The provisions of your stock option grant shall be subject to the provisions of the Company’s standard form of Stock Option Agreement and Option Grant. It will be recommended to the Company’s Board of Directors that your options be subject to acceleration provisions based upon change of control."

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    This needs more info to truly evaluate, but in general, the less proven a company, the less valuable the stock options. Because most new startups fail. Sometimes, the options end up being worth a lot of money. Because some startups become huge. Generally the advice is to not overweight the value of the options. Commented Jan 23 at 4:41
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    This text is a standard boilerplate stock option component, and on its own is meaningless. 255,010 pieces of paper that you can't even use to wipe your behind with means nothing. Do you know anything about the company's current valuation, business plan, financials, etc?
    – littleadv
    Commented Jan 23 at 5:36
  • Thank you so much for your inputs ya'll! Appreciate it a bunch. @littleadv - We don't know much about the company's current valuation - we only know that it had completed series A 2 years ago for 25 million and is looking for series B this year. How can we find out more about the company's current valuation and financials? Are these questions, you ask the company directly or look up online? And if online, are there legitimate sources we can check.
    – user127371
    Commented Jan 23 at 6:04
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    You'll have to ask the company, it is extremely unlikely that you can find any of that information online for a startup at this stage.
    – littleadv
    Commented Jan 23 at 7:20
  • Thank you @littleadv for your response.
    – user127371
    Commented Jan 23 at 22:42

2 Answers 2

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Note that the impressive number of shares you're being offered an option on may be far less impressive when you ask how many shares will be issued. If it's a million shares you're being offered an option on a quarter of the company. But unless you are one of the first four employees, and an absolutely essential one, the real number is probably far less than that.

Assuming this is coming as part of a job offer: Generally, since options on a startup are a high risk item, you should treat this as encouragement to work your ass off to help the company succeed since you might gain more directly from doing so, rather than as value already promised. That's why they're making the offer.

And note that in most cases the options sorta make up for the fact that the budget is limited and you aren't going to be paid what you're worth any time soon. "I'll gladly pay you Tuesday for a hamburger today" may or may not be a good deal. How much do you believe in the product and how much do you trust management to actually deliver it, then market it successfully? Can you live adequately on what they're willing to give you until then?

If this is not part of a job offer... Not only is it high risk, you can't even influence its success or failure. If it's being offered as a gift, sure, take it, why not. If you're being offered the opportunity to buy this set of options, see above points about high risk even if everything goes well, and about checking what a share actually represents. And ask yourself why this offer is being made to you in particular; if you can't explain that, this can start getting into scam territory very quickly. 250k shares of bupkis is bupkis.

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  • thank you @keshlam for your input. makes sense - will be sharing it with my partner.
    – user127371
    Commented Jan 23 at 22:44
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I second everything @keshlam wrote.

But I find the number of shares odd and something to keep an eye on. I'll spitball some numbers here...

You say the company did a Series A round at a $25 million valuation 2 years ago and is looking for a Series B round of funding. In 2022, Series B rounds had a median valuation of $35 million and a mean of $50 million. Let's be reasonably generous and say that the company is looking to value itself at $50 million.

Practically, it seems highly unlikely that the company a company that has been around long enough to be looking for Series B funding is going to offer a new employee off the street options on more than 1% of the company unless your partner is getting hired into a very senior position (i.e. your partner is being hired as the CIO because they have a history of building out the sort of IT department the company is looking for). If they are offering your partner 255,000 shares, that implies that there must be at least 25.5 million shares outstanding (you can ask the company how many total shares outstanding there are). Practically, I would expect your partner is being offered options on much less than 1% of the shares.

Just as a practical matter, companies generally like to keep their stock price well above $1 if only to keep the accounting easier. Technically, there is no difference between a $25 million company with 25 million shares of stock each valued at $1, that same $25 million company with 2.5 million shares of stock each valued at $10, and that same $25 million company with 250 million shares of stock each valued at $0.10. But practically, it is deeply annoying to have $0.10 shares where adjusting the price by a penny moves the price 10% or to account for shares priced in fractional cents.

If your partner is being offered options on 1% of the total shares of the company and the company is really worth $50 million, that would imply that each share is valued at ~$1.96. If your partner is being offered options on 0.25 - 0.5% of the total shares of the company, the share price would be in the $0.50 - $1 range. Presumably it was half that after the Series A round.

That's weird. It's not wrong per se. Maybe the founders didn't know any different and set the initial stock price at $0.01/ share and haven't bothered to do any splits since then. But I would be suspicious that there was some sort of mass dilution that took place earlier. That's a concern because it could happen again.

Some dilution is perfectly normal during funding rounds. The company prints more shares of stock, the investors buy those shares, the company gets the investor's money and the existing investors own less of a more valuable company. It would be pretty normal that a company has 1,000 shares outstanding, you hold 100 of those shares, and the company negotiates with a new investor to issue another 500 shares of stock in return for the investor's money. You go from owning 10% of the company (100/ 1000 shares) to owning 6.67% (100/ 1500 shares) but the company is more valuable so your total investment is the same. But sometimes this process can get a bit sketchy as when Eduardo Saverin's stake in Facebook got diluted to almost nothing. Having millions of outstanding shares may indicate that something similar happened here. Or it may indicate that the company was in rough shape at some point and an investor got really generous terms for rescuing it (i.e. the investor got 99.9% of the company rather than 30% in my example above) and the number of shares had to grow at the time to make that happen. Either of those are something to be potentially worried about.

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  • Isn't this all just speculation? Knowing the # of shares only provides 0 information. It is far simpler just to posit that "economically, a company is unlikely to give a significant amount of its equity to employees through stock options, and the value of options provided is likely low, unless proven otherwise". There are 10,000 other ways that this simple assumption could be true. For example, what if there are just multiple share classes? "companies generally like to keep their stock price well above $1 if only to keep the accounting easier" is also just a weird assertion. Commented Jan 24 at 2:58
  • Thank you @Grade'Eh'Bacon and Justin for your detailed inputs. I was not clued much into the stock options world, so this has been very helpful.
    – user127371
    Commented Jan 25 at 6:01

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