Advice on an offer from a start-up
i have been offered a position in a start-up...i was initially told that my 100,000 share options were 0.25% of "the allocated shares".
In my own research i came across terms for "diluted stock". which i believe is all the shares have company have issued... but may not have allocated.
I asked the company for their total number of diluted shares and they replied saying that there were about 250million shares in issue on a fully diluted basis.
Does this mean that my % of the company is actually 0.04%.
Or if they have only allocated 40 million shares then my percentage is 0.25%.... which is what they are telling me.
I'm concerned that even if they have only issued 40million shares... if they go through further rounds of funding.. my percentage will be diluted even further.
Also... if the company were to be bought...(which i believe is their exit strategy) when the buyer comes to value the company... do they look at the diluted stock only when making an offer?
They are well financed.. $100million... and have visions to be worth $1billion in 3-5 years..
if they did reach that $1billion dollar valuation.. would i be right in saying that $1billion dollars divided by 250,000,000 shares.. gives a valuation of $4 a share.. so my options would be worth $400,000 (less the strike rate).
thanks in advance....J
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Options are just pieces of paper, they don't worth much. More important things are salary, benefits, bonuses and of course working environment, challenge, and interest. – Littleadv 12 years ago
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@littleadv While I agree with you that working environment, challenge, and interest should be the primary concern of a startup employee, options are a concern also. Secondary, but still a concern. So, any doubts regarding them are welcome, as others may ask the same question in the future. – Brunno Silva 12 years ago
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@Brunno not arguing about that, just pointing out that the OP is calculating profits not yet made, while not mentioning at all anything else that IMHO is significantly more important. That affects the quality of the answers to be given. – Littleadv 12 years ago
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@littleadv. Thanks for your advice.. i left out all the other aspects as i am happy with the salary and bonus. I've only included my question on stock options as that is the part i am concerned about and it seemed inconsistent with what i was being told. I was initially been told that i would be receiving 0.25% of the company but in my calculations its on 0.04%. My question is whether my calculations based on diluted stock are correct or not? If anyone has a view on that i would be grateful. thanks....James – James 12 years ago
1 Answer
Percent means nothing, value means everything.
You're right on both fronts. You're being offered 0.25% NOW, which will likely turn into 0.04% over time. The idea is, though, that by the time the company has issued enough stock to dilute your PERCENTAGE to 0.04%, that 0.04% is worth far more than the original 0.25% of stock.
Example:
You're offered 0.25% of a company with a $100 value. Your stock value is $0.25. Fast forward 5 years, the company has fully diluted and you now own only 0.04% of the stock, but it sells for $1,000,000. That 0.04% is worth $400.
