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I got an entry offer for an Engineering position: base salary 90K/y at a start up (around 50 employees, got good funding during the last year). The package includes an ESPP for 6000 stocks (1 year cliff, 4 year vesting). The strike price is fixed at 0.3$ (duration 10 years, fixed for all 6000) and the current value of the company's stock is set to roughly 2$. The company's current worth is 50Mn$

The company is not headquartered in the US. It gets 409A Valuations.

I am trying to assess whether this is a good package but all these concepts are somewhat new to me.

I collected some question:

  • Are 409A Valuations also used by other countries or does that mean I will have to meddle with the IRS upon execution of the options? Or where will it be taxed?

  • The company is not publicly traded. In that case to whom would I sell these stocks. What are usual use cases?

  • How do I roughly evaluate the worth of this package? What additional costs apart from buying the stocks for 0.3$ and taxes should I take into account?

  • If for example the value of the company's stock increases to 4$, does that mean I get roughly 24'000$ - taxes?

  • Apart from a possible bankrupty or loss of stock value. What are other dangers of ESPPs?

  • What is your assessment of this offer (I know its difficult to tell, happy to provide more information if needed)

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    Try to avoid asking many questions in one question; usually you will find that several of your questions go unanswered. – Eric Lippert Jun 19 '17 at 18:40
  • The short answer to: who do I sell this to? is right now, no one. You are gambling that the company will go public -- in which case you can sell your stock on the market like anyone else -- or that someone will buy the whole company -- in which case you can sell to them. This is called a valuation event because it is the thing that actually establishes the value of your shares. What they are allegedly "worth" and what you paid for them doesn't establish anything. – Eric Lippert Jun 19 '17 at 18:41
  • It's a sheer gamble, like a lottery. Of say one hundred of these companies, 99 will not exist in a couple years. By all means - with the other one you'll make "lots of money" from your share instruments. The comment that the company is "worth" 50m presently is meaningless, it's almost certainly worth nothing (ie: nobody would buy it). – Fattie Jun 19 '17 at 20:14
  • "In that case to whom would I sell these stocks." to be blunt, in the vast majority of cases "nobody" - it's just totally useless paper. Most programmers collect piles of such useless paper over a career. By all means, yes, like winning a lottery (call it "1 chance in 100") the company will go big and you'll make "a nice pile of money". – Fattie Jun 19 '17 at 20:17
  • Err, obviously I meant to type: the company could go big: there's a tiny, tiny chance the company will go big, in which case you'll make a few dollars. in the vast majority of cases the paper evaporates and is worth nothing whatsoever. – Fattie Jun 20 '17 at 10:51
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You have a lot of different questions in your post - I am only responding to the request for how to value the ESPP.

When valuing an ESPP, don't think about what you might sell the shares for in the future, think about what the market would charge you for that option today. In general, an option is worth much less than the underlying share itself. For the simplest example, assume you work at a public company, and your exercise price for your options is $.30, and you can only exercise those options until the end of today, and the cost of the shares on the public stock exchange is also $.30. You have the same 'strike price' as everyone else in the market, making your option worth nothing. In truth, holding that right to a specific strike price into the future does give you value, because it means you can realize the upside in share price gains, without risking any money on share losses. So, how do you value the options?

If it's a public company with an active options market, you can easily compare your $.30 strike price with the value of call options in the market that have a $.30 strike price. That becomes the value to you of the option (caveat: it is unlikely you can find an exact match for the terms of your vesting period, but you should be able to find a good starting point).

If it's a public company without an active options market, you will have to do a bit of estimation. If a current share is worth $.25 (so, close to your strike price), then your option is worth a little bit, but not much. Compare other shares in your industry / company size to get examples of the relative value between an option and a share. If the current share price is worth $.35, then your option is worth about $.05 [the $.05 profit you could get by immediately exercising and selling, plus a bit more for an option on a share that you can't buy in the open market].

If it's a private company, then you need to be very clear on how shares are to be valued, and what methods you have available to sell back to the company / other individuals. You can then consider as per above, how to value the option for a share, vs the share itself. Without a clear way to sell your shares of a private company [ideally through a sale directly back to the company that you are able to force them to agree on; ie: the company will buyback shares at 5x Net income for the previous year, or something like that], then the value of a small number of shares is very nebulous. There is an extremely limited market for shares of private companies, if you don't own enough to exert control.

In your case, because the valuation appears to be $2/share [be sure that these are the same share classes you have the option to buy], your option would be worth a little more than $1.70, if you didn't have to wait 4 years to exercise it. This would be total compensation of about $10k, if you were able to exercise today. Many people don't end up working for an early job in their career for 4 years, so you need to consider whether how much that will reduce the value of the ESPP for you personally. Compared with salary of 90k, 10k worth of stock in 4 years may not be a heavy motivating compensation consideration. Note also that because the company is not public, the valuation of $2/share should be taken with a grain of salt.

  • Right. Note that any competent programmer can get a freelance job and make "10k" any day of the week. It's pretty much meaningless to put 10k against "four years". – Fattie Jun 19 '17 at 20:15
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    Note that "The company is not publicly traded.". (Given that, then the assertion by the company ... "the company's stock is set to roughly 2$." seems totally meaningless.) – Fattie Jun 19 '17 at 20:19
  • @Fattie Thanks for pointing that out; I missed it in the OP's list of questions. I am editing to highlight this scenario that I only briefly touched on before. – Grade 'Eh' Bacon Jun 19 '17 at 21:01

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