How to evaluate ESOP offer at salary negotiation?
3 comments
9/10 startups fail (90%). Of the 10% that succeed, 90% do not payout to anyone but the investors and founders with preferred shares. That is to say, there is a 1% chance those shares pay out to you, the non-preferred share holder.
So take the current strike price * # of shares offered * .01 = how much they are actually worth.
So, if they are offering you 100,000 shares 100,000 * .01 = 1,000 1,000 * $1 = $1,000
The shares are worth $1,000 dollars. So you can accept $89,000, or they can bolster the share amounts, or they can change the shares to prefered.
EDIT: I realized now you said ESOP - so these are actually tradable shares on the stock market. They are worth face value of the stock price right now then, and it's up to you to decide if you will get wealthier or poorer based on this investment.
If you want to be pedantic, this is a good article with the things you need to consider with regards to how you can collect these funds and the tax considerations: https://cleartax.in/s/taxation-on-esop-rsu-stock-options
So take the current strike price * # of shares offered * .01 = how much they are actually worth.
So, if they are offering you 100,000 shares 100,000 * .01 = 1,000 1,000 * $1 = $1,000
The shares are worth $1,000 dollars. So you can accept $89,000, or they can bolster the share amounts, or they can change the shares to prefered.
EDIT: I realized now you said ESOP - so these are actually tradable shares on the stock market. They are worth face value of the stock price right now then, and it's up to you to decide if you will get wealthier or poorer based on this investment.
If you want to be pedantic, this is a good article with the things you need to consider with regards to how you can collect these funds and the tax considerations: https://cleartax.in/s/taxation-on-esop-rsu-stock-options
Thanks for the info. I'm still a bit confused though. Correct me if I'm wrong, but the strike price is not necessarily the value of the stock, no? Plus I would need to subtract it from the value of the stock in order to exercise the option. So let's say after 4 years I want to exercise 100,000 stocks at 1$ strike price each. Let's say the the current valuation is 5$ per stock. My return is 100,00$ * 5, minus the cost of the strike price (100,000$). In total that's 400,000$
So I'm not sure why the strike price is used to define the value, since I would need to pay that amount anyway. I would make a profit for any dollar for which the stock is valued after the strike. Or am I getting it wrong?
So I'm not sure why the strike price is used to define the value, since I would need to pay that amount anyway. I would make a profit for any dollar for which the stock is valued after the strike. Or am I getting it wrong?
You are right, thank you for correcting me.
So to add for others: > stock option strike price is usually equal to the FMV of the company’s stock on the day the option is granted. ergo, if the strike price when the options are granted is $1, they are worth $1, and your cost to exercise is to purchase them at $1.
Ergo, as stefanDM points out, they have no additional value to your salary on day 1. They only have value if 1) They increase in value AND 2) They become tradeable on either a public or private exchange / are purchased by another company.
I found this article to be useful: https://carta.com/blog/equity-101-stock-economics/#:~:text=F....
So to add for others: > stock option strike price is usually equal to the FMV of the company’s stock on the day the option is granted. ergo, if the strike price when the options are granted is $1, they are worth $1, and your cost to exercise is to purchase them at $1.
Ergo, as stefanDM points out, they have no additional value to your salary on day 1. They only have value if 1) They increase in value AND 2) They become tradeable on either a public or private exchange / are purchased by another company.
I found this article to be useful: https://carta.com/blog/equity-101-stock-economics/#:~:text=F....
Adding to the above, which is pretty accurate for a personal evaluation.
Don't share that "math" with the employer during your negotiation.
Don't share that "math" with the employer during your negotiation.
Note: my experience is in private equity from VC backed companies. ESOPs are a bit different in ways I don't have experience with.
The monetary value of private equity is in most cases nonexistent. If it is a private company that is not already riding high (think airbnb when everyone knew it had struck gold) then the equity offer is nothing but a lottery ticket. I took a pay cut at a startup that sold me on accepting the offer with the pitch: "if we were to sell for $100 million like XYZ company, you'll be a millionaire". We ended up unable to raise another round of funding and my equity became worthless. Obviously this is my own biased personal experience and if you believe in the company and think the experience + shot at growing something is worth it to you, go for it! My experience was financially less ideal, but it led to a number of opportunities down the line that I wouldn't take back. But understand that trying to convert your esops into a direct monetary value isn't easy to do because they aren't terribly liquid (unlike vested equity in a publicly traded company).
Things to ask: Have they recently raised a round of funds and at what valuation? Why are they raising the money? What sort of operational runway do they have?
The monetary value of private equity is in most cases nonexistent. If it is a private company that is not already riding high (think airbnb when everyone knew it had struck gold) then the equity offer is nothing but a lottery ticket. I took a pay cut at a startup that sold me on accepting the offer with the pitch: "if we were to sell for $100 million like XYZ company, you'll be a millionaire". We ended up unable to raise another round of funding and my equity became worthless. Obviously this is my own biased personal experience and if you believe in the company and think the experience + shot at growing something is worth it to you, go for it! My experience was financially less ideal, but it led to a number of opportunities down the line that I wouldn't take back. But understand that trying to convert your esops into a direct monetary value isn't easy to do because they aren't terribly liquid (unlike vested equity in a publicly traded company).
Things to ask: Have they recently raised a round of funds and at what valuation? Why are they raising the money? What sort of operational runway do they have?
To follow on to dshoemaker's excellent response.
ESOPs are definitely a lottery ticket based on the value of an upcoming liquidity event. There is a very small, though not entirely absent, market for shares in private companies. The chance of selling your options before a liquidity event is low, so probably best to think about what happens when your company IPOs or is bought by a public company.
The company has a current valuation based on the number of shares authorized, the number of shares issued and the number of dollars invested in the company. For example, if someone invested $10M in the company in an A round in exchange for 1M shares and there were a total of 10M shares authorized, then the company would have a post-money valuation of $100M.
Later on, if your company goes through a second round, like someone buys 1M shares for $20M, then suddenly the company has a post-money valuation of $200M.
Unless the board authorizes and/or issues more shares. If your company was worth $200M after the second round and the board doubles the number of shares in the company, then you're back down to $100M total market cap.
Hopefully your company isn't doing that too often 'cause it often makes previous investors angry when they had an investment worth $10M and suddenly it's worth $5M.
There's also the issue of post-IPO lockouts, where you're not allowed to trade in shares (and most likely exercise options) for 30, 90 or 180 days after an IPO or acquisition. And there's also the issue of taxes. In order to get preferential tax treatment, you have to own securities for a year. It may be difficult on your budget to buy $30,000 worth of stock and hold it for a year if you're only on a $60,000 annual salary.
But... the simple answer is the value of the option is the number of shares in the option grant divided by the total shares issued multiplied by the increase in the per share value between the day you exercise the option and the "strike price" of the share on the day specified in the option grant.
It is an unfortunate characteristic of sili valley firms that they are loathe to reveal the total number of outstanding shares or the per share valuation before an IPO (thought there are reasons they don't want to do this. It's not just them being jerks.)
It is often hard to get sufficient information to make a rational decision about valuing options. Ask your potential employer what the outstanding number of shares and the valuation of the company are. They'll probably say it's their policy to not reveal such details, but it can't hurt to ask. If it does hurt to ask, they're probably a scam company and you didn't want to work there anyway.
After years in the valley, my ISOs were never extremely lucrative. Two thirds of my ISOs were eventually valueless due to share dilution or the company tanking. The remainder were definitely not "life changing money." I was lucky enough to be a founding member of several companies. In those cases I got "founders shares" in exchange for a financial and labor investment in the company. They turned out to be considerably more lucrative than any ISOs I received.
Most importantly, your mileage may vary. There's a common conception that 90% of startups fail. I don't know what the real numbers are, but I'm sure they're pretty high. You may be working for a company in that 10%. Or maybe not.
ESOPs are definitely a lottery ticket based on the value of an upcoming liquidity event. There is a very small, though not entirely absent, market for shares in private companies. The chance of selling your options before a liquidity event is low, so probably best to think about what happens when your company IPOs or is bought by a public company.
The company has a current valuation based on the number of shares authorized, the number of shares issued and the number of dollars invested in the company. For example, if someone invested $10M in the company in an A round in exchange for 1M shares and there were a total of 10M shares authorized, then the company would have a post-money valuation of $100M.
Later on, if your company goes through a second round, like someone buys 1M shares for $20M, then suddenly the company has a post-money valuation of $200M.
Unless the board authorizes and/or issues more shares. If your company was worth $200M after the second round and the board doubles the number of shares in the company, then you're back down to $100M total market cap.
Hopefully your company isn't doing that too often 'cause it often makes previous investors angry when they had an investment worth $10M and suddenly it's worth $5M.
There's also the issue of post-IPO lockouts, where you're not allowed to trade in shares (and most likely exercise options) for 30, 90 or 180 days after an IPO or acquisition. And there's also the issue of taxes. In order to get preferential tax treatment, you have to own securities for a year. It may be difficult on your budget to buy $30,000 worth of stock and hold it for a year if you're only on a $60,000 annual salary.
But... the simple answer is the value of the option is the number of shares in the option grant divided by the total shares issued multiplied by the increase in the per share value between the day you exercise the option and the "strike price" of the share on the day specified in the option grant.
It is an unfortunate characteristic of sili valley firms that they are loathe to reveal the total number of outstanding shares or the per share valuation before an IPO (thought there are reasons they don't want to do this. It's not just them being jerks.)
It is often hard to get sufficient information to make a rational decision about valuing options. Ask your potential employer what the outstanding number of shares and the valuation of the company are. They'll probably say it's their policy to not reveal such details, but it can't hurt to ask. If it does hurt to ask, they're probably a scam company and you didn't want to work there anyway.
After years in the valley, my ISOs were never extremely lucrative. Two thirds of my ISOs were eventually valueless due to share dilution or the company tanking. The remainder were definitely not "life changing money." I was lucky enough to be a founding member of several companies. In those cases I got "founders shares" in exchange for a financial and labor investment in the company. They turned out to be considerably more lucrative than any ISOs I received.
Most importantly, your mileage may vary. There's a common conception that 90% of startups fail. I don't know what the real numbers are, but I'm sure they're pretty high. You may be working for a company in that 10%. Or maybe not.
Let's say that the average salary for my role is 90k/year, and I get offered 60k in cash and the rest in esops. How do I measure the current value of the esop I'm offered (to make up for the remaining 30k) and understand if the amount of esop offered is fair?
Thanks!