Skip to main content

Pricing Employee Options

A startup I advise on occasion just repriced employee options 50% higher, while pricing preferred shares lower. On the face of it, it seems skewed, but when you really look at it, it's very skewed. Here's why.

Let's say employee options are priced at .15 cents, and preferred is at .40 cents.  We'll say there are 10 million shares, so that puts the value at around $4 million.

But there is $3 million invested, and the liquidation preferences are set at 2x, so Common won't see anything for any sale of the company under $6 million, and won't see the same price per share as Preferred until $12 million.

So Common = zero for anything under $6 million. And the current value as determined by the preferred share price is $4 million. So Common shares and option pricing should be not much more than zero.

Pricing options has gotten more complex since the introduction of 409A (See Brad Feld's posts about that here). But common sense tells us that you can't assign zero value to Common shares through liquidation preferences, and then charge $.15 per Common option. And that's without getting into more esoteric and nuanced about the superiority of Preferred shares to Common, or situational arguments.

Employee options have nowhere near the value of Preferred, which supports my argument that VCs tend to value their own capital over the people designated to make that capital much more valuable, as reflected in the deal terms.

If you have any insights into this, please post in the comments.

Comments

Post a Comment

Popular posts from this blog

Beta Signup

I've been working for quite a while on a new search concept, though the further in I get, the closer the rest of the world gets to what we're doing. So today I'm inviting you to sign up for the rather modest beta, which will be ready soon if we can nail down a few difficult  details. Jawaya is a way of navigating the web and getting better results. And that's as much as I can say right now, because we're not a funded startup, and things are moving really fast in this space--it's going to be very competitive. I predict there will be about 10 funded startups in the next 6 months doing something similar. One of them will be mine, and we aim to make it the best. We're raising a round of capital to fund the team, and are shooting for early sustainability. This is my fifth company; my fourth in the tech space, and my third software company. I think it will be the biggest and can possibly have a positive impact on the world by reducing the amount of time it takes

Where Innovation Happens

As I get closer to a go/no-go decision on a project, I've been thinking about the difference about my vision for the project and the supportive innovations to enable the core innovations The vision combines (in unequal parts) product, core innovation as I imagine it, the application of that core innovation, design, marketing,  developer ecosystem, and business development. The core innovation enables everything else, but it's the application of the innovation that makes it meaningful, useful, and in this case, fun. This week we're testing initial approaches to the implementation for our specific application, and that's where we'll develop the enabling innovations, which is basically where the rubber meets the road. The difference is that the enabling innovation happens at the source of real problems only encountered in the making of something, and in a project like this just getting the essence of it right isn't enough; it also has to be safe, the compone

The Real Jobs Problem

It's the economy, stupid.  Well, yes, it always has been, if you're in the distortion field of politics.  But whose economy? The pundits, the White House, the Republican candidates all miss the mark. They keep talking about debt, taxes, and monetary policy. None of those things tell the real story behind today's economy.  The Old Economy Keynes was right--in the old economy. Economy gets weak, pump some money into the economy through public works projects, which  1) puts people to work, which  2) boosts the economy and  3) generates new tax revenue, while  4) leaving us with another generation of reliable infrastructure to support  5) more growth (for growth's sake, which is another post).  The Beach Ball Imagine a beach ball, partially deflated to represent a recession. Got it? Now imagine the govt pumping that beach ball back up through sensible public investment (which we haven't seen for decades). The New Economy Same beach ball, same pum