I'm left with the sense that this is a response to some other post, not mine?
To be clear, I'm talking about scenarios where one would join a startup as a regular employee. Not talking about angel investing or anything like that.
I am just saying that common shares are extremely high risk investments. When you start putting money into an investment I believe you should aim to get the same risk profile as other investors that are putting money in. If exercising your shares is a trivial cost, then it doesn't matter. If exercising shares costs a lot then it really really matters.
Common shares have zero value until after the preferential shares are in the money. i.e. buying common shares is as risky as investing in call options.
Angel investing is extreme risk, call options are extreme risk, and as a sweeping generalisation: common shares are riskier than those. I'm only mentioning Angel investing because we all know how risky that is, so it is a baseline to compare against.
You answered JonChesterfield who's point was "here's some tokens". Your reply is entirely sensible and you are rightly saying those tokens can end up winning and you explain a good strategy to get valuable tokens and gamble some of your pot.
I am attempting to amplify JonChesterfield's comment, perhaps I'm failing!
Aside: I really appreciate your comment and I am commenting to help my own thinking. I have been trending towards doing Angel investments which requires understanding VC incentives. I'm past being an employee so I'm not sure how relevant my comments are to anyone! VCs and the VC ecosystem use the confusion between the details of public market shares, common shares, and preferential shares to the advantage of the VCs.
I guess you're equating being an early employee to being an angel investor in that startup? In some sense, that's kind of true. But still, not how most employees of the company are going to think about it. You have to work somewhere.
> If exercising your shares is a trivial cost, then it doesn't matter.
Well yes, that was my point. That's why you'd ideally join very early, so you can early exercise and buy all the options up front for very little money.
It is a bit technical for my level of ignorance: and it seems irrelevant.
Interesting how it points out that companies get a financial advantage on their books if you early exercise.
I think it is saying that optionality has a value to the person that owns the option and that early exercise loses that value.
I think you are saying that in the winning case, you are better off if you have exercised early. Perhaps you are not costing the losing case properly? Lottery tickets!
Thank you. I appreciate learning from you and I hope I have learnt something from that article which I wouldn't have done otherwise (even if I don't understand the pricing details).
My eyes tend to glaze over whenever volatility is mentioned. Relevant to public stocks and options in public markets. I suspect volatility is not a useful measure looking at investing in early-stage startups since value tends towards all or nothing. The distribution of returns for a single startup seems fairly wacko - hard to model.
> I think you are saying that in the winning case, you are better off if you have exercised early. Perhaps you are not costing the losing case properly?
That's why I'm emphasizing the part about joining very early. Early exercise is ideal when you join when the stock is worth basically nothing, but doesn't make sense later in the startup's life. Which is why in the original post I say that IMO you don't want to join a startup in the middle of its growth. Only very early, or very late.
For example: I joined one very early startup where my option price was a small fraction of a penny. I early exercised and bought many hundred thousand shares for less than $20. There's no downside, worst case I lose less than the price of lunch.
The other reason to early exercise is freedom. You can leave without angst about losing your unexercised options. There are no golden handcuffs, you're free to move jobs.
> I early exercised and bought many hundred thousand shares for less than $20
Right. This is what has confused me. I had presumed that the options were a much more valuable part of your pay package (like tens of thousands to exercise early).
Yeah, $20 is a good price for a lottery ticket!
I would presume few VC run companies would give away shares that cheaply now?
> I would presume few VC run companies would give away shares that cheaply now?
You have to join early, before VCs get involved. After a funding round prices spike 1000x or more.
> options were a much more valuable part of your pay package
This sort of makes no sense. Options are not part of the pay package per se because they are worth nothing. In some far future they might be worth something (or rarely, a lot).
You recommend joining a company that sells shares ridiculously cheaply (the legal and accounting costs to process options and shares would easily be more than $20) and lets ignore that companies don't want more shareholders with costs of voting to the existing shareholders (and neither do companies want employees to be able to see the books or interfere with negotiations).
And choose to be an early employee at a place that somehow gets a 1000x valuation boost between Angel and Round A. $100k would be a small Angel round so round A would be $100 million (rather an outlier). 1000x boosts are simply not easy to find.
Your facts just don't line up: if you got lucky then your advice simplifies down to "get lucky".
The language you use to describe option grants suggests you haven't. A startup does not "sell shares" "ridiculously cheaply". They grant options and the valuation is what it is at the moment.
I'm a successful founder in New Zealand that bootstrapped.
You are correct that I'm unfamiliar with employee options: that is why I'm asking what you are saying because it just doesn't make any sense to me (looking at it as a founder). I'm trying to understand but failing and your explanations feel to me like they go left-field every time.
The VC culture here is rather thin and options are not commonly used.
> par value be set at $0.00001 and no higher than $0.0001 per share
Sure, that is at inception. If you are getting shares at inception you are one of the first employees. One Angel investor and the shares get a valuation and that valuation is nothing like par value. Money for early employees often comes from investors. I guess the founders could be paying you but that would be less common.
When your options convert you pay the option strike price, not the par value. Setting the options at a price close to par would be extremely strange because they would dilute the founders.
I guess I'm saying that I don't understand because the financial incentives seem wrong and everything you've said doesn't seem to fit together to me: including your comment on par value.
"The exercise price may never be less than the fair market value (FMV) of the underlying stock on the date the option is granted."
Fair market value shouldn't be anywhere near the initial par value (unless the business is close to worthless).
I guess it could make sense if the founders decided they were giving you x% of stock, and they used options as an intermediate step to do that for some reason (e.g. vesting).
> If you are getting shares at inception you are one of the first employees.
Yes. Going back to the very top of the thread, that's what I said. The best time to join a startup is very early (or very late).
> (unless the business is close to worthless)
Yes. A new startup is basically worthless, it's just a piece of paper and they haven't built anything yet. That's a good time to join.
> I guess it could make sense if the founders decided they were giving you x% of stock, and they used options as an intermediate step to do that for some reason (e.g. vesting).
Yes, of course. That's literally what joining a startup is all about!
I guess the market is different in NZ. You said "The VC culture here is rather thin and options are not commonly used."
It is all about the options in the US (or SV at least). If founders didn't give you x% of the company via vesting options, why would anyone ever join a startup?
I'm left with the sense that this is a response to some other post, not mine?
To be clear, I'm talking about scenarios where one would join a startup as a regular employee. Not talking about angel investing or anything like that.