Ask HN: Need help in understanding private equity offer
30 comments
The $70 billion valuation is suspect. Far too high for nearly all early stage companies. SpaceX raised last year (?) around $100 billion for reference.
I think you misspoke? No company in history has ever raise $100b in a year, but that’s about what SpaceX is valued at now.
OP clearly means they raised around a $100b valuation.
Perhaps I was not clear enough ;). Thank you for clarifying, much appreciated.
That’s why I assumed it and politely clarified.
Spacex has raised about 8B total since founding in 2002
Think OP meant $70M not $70B if they just raised $17M in funding.
To calculate your gross $ value today, you need to know your # of shares (10K) divided by total fully diluted outstanding shares (607,500,000) multiplied by the valuation (probably $70M).
Strike price is your cost to exercise the options, which should be deducted from your gross value. You will likely also incur taxes unless you exercise right away via 83B election
To calculate your gross $ value today, you need to know your # of shares (10K) divided by total fully diluted outstanding shares (607,500,000) multiplied by the valuation (probably $70M).
Strike price is your cost to exercise the options, which should be deducted from your gross value. You will likely also incur taxes unless you exercise right away via 83B election
The value is $0 today because there is no market (it’s an early stage startup) where you could sell those shares(?)
The shares are a lottery ticket at best unless you have conviction in the companies ability to succeed and become more valuable overtime.
The shares are a lottery ticket at best unless you have conviction in the companies ability to succeed and become more valuable overtime.
$70M valuation makes more sense.
Only 10K shares feels very low though if there are really 607M outstanding shares (seems too high). It's Seed-Series A, your friend should be getting at least 0.1% even as a junior IC: : https://topstartups.io/startup-salary-equity-database/
Only 10K shares feels very low though if there are really 607M outstanding shares (seems too high). It's Seed-Series A, your friend should be getting at least 0.1% even as a junior IC: : https://topstartups.io/startup-salary-equity-database/
IMO something is wrong with this database: most of the pre-seed startup entries have market* salaries.
--
*) might be below today's market, but still not something a pre-seed startup could pay their employees.
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*) might be below today's market, but still not something a pre-seed startup could pay their employees.
Given the extremely suspect numbers here, your friend should assume they are receiving $0 in equity.
10k is 1% of a million.
So <0.018% of 607 million.
At a company exit at $6 billion (very unlikely), the shares would be worth about $120,000.
For perspective Twitter went public at $14 billion and Google at $23 billion.
So a Google size IPO would be less than half a million dollars.
That’s without additional dilution, liquidation preferences for preferred stock, and getting fired to increase returns for those first in line.
And less exercise price.
And capital gains taxes.
It’s not a bullshit offer, because the company hopes your friend believes in it.
That makes it horseshit.
Good luck.
So <0.018% of 607 million.
At a company exit at $6 billion (very unlikely), the shares would be worth about $120,000.
For perspective Twitter went public at $14 billion and Google at $23 billion.
So a Google size IPO would be less than half a million dollars.
That’s without additional dilution, liquidation preferences for preferred stock, and getting fired to increase returns for those first in line.
And less exercise price.
And capital gains taxes.
It’s not a bullshit offer, because the company hopes your friend believes in it.
That makes it horseshit.
Good luck.
I don’t usually comment on my own posts, but…
The important takeaway is the offer is a tell.
The founders are giving fair warning that they do not want your friend to get rich.
That’s different from not caring if your friend gets rich.
Quite different from being happy if your friend gets rich.
And the polar end of the goodwill spectrum from trying to make your friend rich.
The important takeaway is the offer is a tell.
The founders are giving fair warning that they do not want your friend to get rich.
That’s different from not caring if your friend gets rich.
Quite different from being happy if your friend gets rich.
And the polar end of the goodwill spectrum from trying to make your friend rich.
> at a valuation of $70B.
> it is a very early stage startup.
One of these does not fit.
> it is a very early stage startup.
One of these does not fit.
Maybe that B is an M?
Could be but with 607.5MM shares outstanding, that 10k full vest would have a FMV of of a few hundred dollars - they wouldn't even need to give options
Nope, it is a B
Raising 17M dollars at a 70B valuation is insane for an early stage company. Assume the shares are worthless. Consider avoiding the company all together because whoever is at the top has no clue how finance works.
At 70M the calculus is much different.
At 70M the calculus is much different.
Well then the information you shared strains credulity, facts seems inconsistent & extremely odd- Why is a 17MM financing even worth mentioning if its worth 70B? And there are only a handful of companies even in that ballpark https://en.wikipedia.org/wiki/List_of_unicorn_startup_compan...
You will need to know the number of share that have been issued to calculate the current price per share.
Price per share also has tax implications.
Strike price means they will have to pay 0.01 per share or $100 total for the stock, which is largely irrelevant.
For example, If only 20k shares have been issued, they will have to pay income taxes on 35B over 3 years.
Is 70B the valuation they are being offered stock at or what the 17m investors payed?
https://carta.com/blog/equity-101-exercising-and-taxes/
https://secfi.com/learn/exercise-stock-options-tax-implicati...
Price per share also has tax implications.
Strike price means they will have to pay 0.01 per share or $100 total for the stock, which is largely irrelevant.
For example, If only 20k shares have been issued, they will have to pay income taxes on 35B over 3 years.
Is 70B the valuation they are being offered stock at or what the 17m investors payed?
https://carta.com/blog/equity-101-exercising-and-taxes/
https://secfi.com/learn/exercise-stock-options-tax-implicati...
Impossible to answer without, at a minimum, knowing how many shares have been issued.
Without knowing the total number of shares, it's impossible to know what your friend's 10k shares would be worth. e.g. if there are 100M shares total, then his shares would be worth 10k/100M = 0.0001 of the valuation of $70B, i.e. $7M. In order to own these shares, he would have to exercise the options, meaning he would need to pay the strike price of $0.01 per share, i.e. 10k * $0.01 = $100.
Also important to note is the tax treatment of these shares. Depending on the jurisdiction, it's possible that he would be taxed on the value of these shares when they are exercised, and not when they are sold. In the example above, that would mean that he would owe taxes on $7M whenever they were exercised.
Check out something like https://smartasset.com/investing/how-do-stock-options-work or https://www.holloway.com/g/equity-compensation for more info. (I just found these by googling [guide to stock option compensation].)
Also important to note is the tax treatment of these shares. Depending on the jurisdiction, it's possible that he would be taxed on the value of these shares when they are exercised, and not when they are sold. In the example above, that would mean that he would owe taxes on $7M whenever they were exercised.
Check out something like https://smartasset.com/investing/how-do-stock-options-work or https://www.holloway.com/g/equity-compensation for more info. (I just found these by googling [guide to stock option compensation].)
The total number of shares will be limited to 607,500,000
It seems strange to cap the number of shares, which makes me wonder if this is the number of shares in an option pool. If so, nothing can be inferred about percentage ownership, except that your friend would likely own a very insignicant number of shares. Note that a new company typically allocates 10M shares, so it's additionally unclear why now there are so many.
This is impossible to guarantee. The company may need to raise more money, likely through equity, not debt. To issue more equity, they will need to issue more shares. That is just how it works.
If you believe that valuation then it's ~$1.5M over 3 years. I would personally ask for explanation of the $70B valuation because if it goes for a piddling $500M your friend gets ~$11K over 3 years
> if it goes for a piddling $500M your friend gets ~$11K over 3 years
They would get 0, you aren't accounting for seniority.
They would get 0, you aren't accounting for seniority.
This is incomplete information. Shares will be limited in what context? Employee option pool, this round, ect.
As far as I know, early-stage companies don't put an upper cap on the number of shares that can exist in the future. Is this some sort of crypto company?
As far as I know, early-stage companies don't put an upper cap on the number of shares that can exist in the future. Is this some sort of crypto company?
heres a good resource https://carta.com/blog/exercising-stock-options/.
Divide the number of shares your friend is getting by the total outstanding. Then multiply that ratio by the valuation, and you've calculated the "value" of the grant. With the following serious caveats:
* Almost any pre-IPO company is going to eventually issue more shares. (Post-IPO, too.) This will dilute existing stock and option grants. Typically companies do refresher grants when this happens—to employees who are still present and performing. Unless it's in your employment contract, you are not entitled to automatic compensation for your existing shares when this happens. The board could issue another 50 billion shares tomorrow and give them all to other people.
* Private valuations are often fairy tales; it's very common to see these slashed in half or more overnight, especially in a business environment where a company needs to keep raising cash. Companies that are undervalued at the $70B level are few and far between—there's a reason we call them "unicorns."
Your friend should 100% talk to a lawyer (not an accountant) about potential taxes. It'll probably cost about $2-4,000 and could save them 100x that much.
* Almost any pre-IPO company is going to eventually issue more shares. (Post-IPO, too.) This will dilute existing stock and option grants. Typically companies do refresher grants when this happens—to employees who are still present and performing. Unless it's in your employment contract, you are not entitled to automatic compensation for your existing shares when this happens. The board could issue another 50 billion shares tomorrow and give them all to other people.
* Private valuations are often fairy tales; it's very common to see these slashed in half or more overnight, especially in a business environment where a company needs to keep raising cash. Companies that are undervalued at the $70B level are few and far between—there's a reason we call them "unicorns."
Your friend should 100% talk to a lawyer (not an accountant) about potential taxes. It'll probably cost about $2-4,000 and could save them 100x that much.
I have a friend that is being issued 10k shares over a period of 3 years at a valuation of $70B. The company recently raised $17M in funding and it is a very early stage startup. The strike price is $0.01. Can someone help me understand what this means? What are the pros and cons of accepting it?
Edit: The total number of shares will be limited to 607,500,000