Purchasing vested shares in a company
July 14, 2009 3:53 PM Subscribe
Best practices for buying vested shares of private company stock?
I just switched jobs. My old company is a VC backed IT company. I have 30 days to purchase my vested shares in the company. I'm looking for resources to determine if I should purchase some or all of my shares.
The company is private. And I don't even know the number of shares outstanding. I'm looking for basic information including:
Can I sell the shares to other employees, or private individuals?
Or most likely I just have to wait until they sell or IPO, correct?
And I'm also looking for basic equations or rules of thumb that might help me value the shares in some way. Which I'm sure is hard without knowing the total shares outstanding.
I am not a founder main owner of the company. You could assume the shares are not a large percentage of the business.
I just switched jobs. My old company is a VC backed IT company. I have 30 days to purchase my vested shares in the company. I'm looking for resources to determine if I should purchase some or all of my shares.
The company is private. And I don't even know the number of shares outstanding. I'm looking for basic information including:
Can I sell the shares to other employees, or private individuals?
Or most likely I just have to wait until they sell or IPO, correct?
And I'm also looking for basic equations or rules of thumb that might help me value the shares in some way. Which I'm sure is hard without knowing the total shares outstanding.
I am not a founder main owner of the company. You could assume the shares are not a large percentage of the business.
What you have now is not stock, but an option to buy stock at a certain price.
This is true, but he also is about to exercise those options and acquire stock, so his questions re: stock ownership are all legit. ISOs normally expire some short time after leaving the company.
Yeah, basically though, we don't know enough to help you make this call, but we can speak to some of your specific questions:
Can I sell the shares to other employees, or private individuals?
Or most likely I just have to wait until they sell or IPO, correct?
Probably not in a completely unfettered way, but possibly. The company probably retains some sort of right of first refusal on your sales of their private stock, but maybe not (look at that whole Craigslist/Ebay scenario for a counter example). Anyway, even if they don't, the market for ISO grant-size portions of startups is pretty illiquid. As in, its pretty damn close to non-existent. Barring some crazy 'success' of the company (e.g. Google) that puts a really high valuation on your chunk, it will probably cost you more in legal fees to sell the stock than the block of stock will be worth, or at least a substantial percentage there of.
However, that doesn't mean the only liquidity event for you is IPO, in fact, its not even the most likely. A company could purchase your company's stock, and pay in either cash, stock in their own company, or a mix of the two.
And I'm also looking for basic equations or rules of thumb that might help me value the shares in some way. Which I'm sure is hard without knowing the total shares outstanding.
I mean, to come up with a real value for these options thats true, but...the thing is, the 'real' value is going to be based on a lot of smoke and mirrors anyway. You should look at this as essentially a binary structure:
- case 1: the company goes broke, zombies along, is acquired after a wash round, later capital has huge liq pref, etc. No money returns to holders of the common you will hold after exercise.
- case 2: the company is acquired or goes public at a substantial (e.g. at least 5x) of the valuation at which your options were struck without counterveiling dilution.
The 'real value' of these shares...doesn't exist. There's too much unknown. It is extremely probably that the way your options were struck was something like this (this is grossly simplified, but it makes the point):
- The founders needed X capital.
- They talked to investors who thought that with X capital, the company could produce Y return, so they negotiated for somewhere between 25 and 50% of the company. Consequently, the value of the company was decided to be whatever it would have to be for X capital to buy the negotiated 25-50% of the company. Note: this doesn't factor in actual earnings, acquisition/IPO price, actual costs, dilution, etc, anything you would need to put a 'real' value on this stock. Because its impossible to model those things at this stage. All the investors are saying is: "this opportunity is larger than $threshold. this opportunity requires $dollars, and we require $ownership, so the company is worth $value."
Then, your ISOs are based on this price. Like, salary class X gets an on-joining ISO bonus equal to options on $x worth of stock and so on.
The equation you need to evaluate is:
p(case2) * size(case2) > costofexercise
where p(case2) is the probability of case2 occurring and size(case2) is the size of the moneypile generated by case2. This is like a shitty expected value estimate.
costofexercise is trivial. Unforunately, p(case2) and size(case2) are very difficult to estimate in most cases, so you have to ballpark it and use a wide safety margin.
The other thing to consider is how costofexercise effects your immediate quality of life, e.g. what is the opportunity cost of risking that money?
Basically, unless you think it is very, very likely that p(case2)*size(case2) is VERY much larger than costofexercise, don't do it. Like, if you didn't have these options, would you be clamoring to invest your hard-earned dough in this small private company at this price? That's what you should think, because that's what you are doing.
posted by jeb at 4:28 PM on July 14, 2009 [1 favorite]
This is true, but he also is about to exercise those options and acquire stock, so his questions re: stock ownership are all legit. ISOs normally expire some short time after leaving the company.
Yeah, basically though, we don't know enough to help you make this call, but we can speak to some of your specific questions:
Can I sell the shares to other employees, or private individuals?
Or most likely I just have to wait until they sell or IPO, correct?
Probably not in a completely unfettered way, but possibly. The company probably retains some sort of right of first refusal on your sales of their private stock, but maybe not (look at that whole Craigslist/Ebay scenario for a counter example). Anyway, even if they don't, the market for ISO grant-size portions of startups is pretty illiquid. As in, its pretty damn close to non-existent. Barring some crazy 'success' of the company (e.g. Google) that puts a really high valuation on your chunk, it will probably cost you more in legal fees to sell the stock than the block of stock will be worth, or at least a substantial percentage there of.
However, that doesn't mean the only liquidity event for you is IPO, in fact, its not even the most likely. A company could purchase your company's stock, and pay in either cash, stock in their own company, or a mix of the two.
And I'm also looking for basic equations or rules of thumb that might help me value the shares in some way. Which I'm sure is hard without knowing the total shares outstanding.
I mean, to come up with a real value for these options thats true, but...the thing is, the 'real' value is going to be based on a lot of smoke and mirrors anyway. You should look at this as essentially a binary structure:
- case 1: the company goes broke, zombies along, is acquired after a wash round, later capital has huge liq pref, etc. No money returns to holders of the common you will hold after exercise.
- case 2: the company is acquired or goes public at a substantial (e.g. at least 5x) of the valuation at which your options were struck without counterveiling dilution.
The 'real value' of these shares...doesn't exist. There's too much unknown. It is extremely probably that the way your options were struck was something like this (this is grossly simplified, but it makes the point):
- The founders needed X capital.
- They talked to investors who thought that with X capital, the company could produce Y return, so they negotiated for somewhere between 25 and 50% of the company. Consequently, the value of the company was decided to be whatever it would have to be for X capital to buy the negotiated 25-50% of the company. Note: this doesn't factor in actual earnings, acquisition/IPO price, actual costs, dilution, etc, anything you would need to put a 'real' value on this stock. Because its impossible to model those things at this stage. All the investors are saying is: "this opportunity is larger than $threshold. this opportunity requires $dollars, and we require $ownership, so the company is worth $value."
Then, your ISOs are based on this price. Like, salary class X gets an on-joining ISO bonus equal to options on $x worth of stock and so on.
The equation you need to evaluate is:
p(case2) * size(case2) > costofexercise
where p(case2) is the probability of case2 occurring and size(case2) is the size of the moneypile generated by case2. This is like a shitty expected value estimate.
costofexercise is trivial. Unforunately, p(case2) and size(case2) are very difficult to estimate in most cases, so you have to ballpark it and use a wide safety margin.
The other thing to consider is how costofexercise effects your immediate quality of life, e.g. what is the opportunity cost of risking that money?
Basically, unless you think it is very, very likely that p(case2)*size(case2) is VERY much larger than costofexercise, don't do it. Like, if you didn't have these options, would you be clamoring to invest your hard-earned dough in this small private company at this price? That's what you should think, because that's what you are doing.
posted by jeb at 4:28 PM on July 14, 2009 [1 favorite]
Response by poster: Thanks milqman,
I will ask the questions you mentioned. But I specifically remember asking for the number of shares outstanding when I was offered the job and they would not release that information. (Which I of course took into consideration when telling them of my required salary.)
But hopefully they'll be willing to answer that or the strike price question.
The only thing I have received from them so far is a sheet with the number of " Incentive Stock Option" vested and the price per share.
I guess what I was hoping for was a rule of thumb for if it's worth buying the stock at x price if the company has Y number of employees and has revenue of Y. I do know Y.
Or something like this:
I know that most non-founding employees have the same number of stock options as I do. So Y employees times Y shares usually equals a rule of thumb % shares outstanding.
I appreciate the help. I know there wasn't a lot of information to go on.
posted by hokie409 at 4:44 PM on July 14, 2009
I will ask the questions you mentioned. But I specifically remember asking for the number of shares outstanding when I was offered the job and they would not release that information. (Which I of course took into consideration when telling them of my required salary.)
But hopefully they'll be willing to answer that or the strike price question.
The only thing I have received from them so far is a sheet with the number of " Incentive Stock Option" vested and the price per share.
I guess what I was hoping for was a rule of thumb for if it's worth buying the stock at x price if the company has Y number of employees and has revenue of Y. I do know Y.
Or something like this:
I know that most non-founding employees have the same number of stock options as I do. So Y employees times Y shares usually equals a rule of thumb % shares outstanding.
I appreciate the help. I know there wasn't a lot of information to go on.
posted by hokie409 at 4:44 PM on July 14, 2009
Response by poster: Thanks jeb,
Yes, that is very good common sense advice. Esp the last paragraph.
I'll try to see what other information I can figure out and not buy them if I can't easily justify the purchase. There are some other intangibles like several of our competitors have been purchased recently and the industry is expected to grow.
Thanks again.
posted by hokie409 at 4:55 PM on July 14, 2009
Yes, that is very good common sense advice. Esp the last paragraph.
I'll try to see what other information I can figure out and not buy them if I can't easily justify the purchase. There are some other intangibles like several of our competitors have been purchased recently and the industry is expected to grow.
Thanks again.
posted by hokie409 at 4:55 PM on July 14, 2009
You may also want to review your options agreement to see if a "cashless" exercise is a possibility.
posted by ZenMasterThis at 5:57 PM on July 14, 2009
posted by ZenMasterThis at 5:57 PM on July 14, 2009
Regarding them not releasing the number of shares outstanding:
-They may have thought that you were asking how many unallocated options were still available (something they may want to keep secret to keep you from negotiating into their incentive pool)
-They should have no problem tell you about the "Stock Plan" which should contain all of the information you need. They should not hesitate to share the number of existing shares in the stock plan. As an option holder, you should be privy to this knowledge. If they indicate otherwise, then they are either ignorant or giving you the run-around.
-The price that is on your "Incentive Stock Option" sheet is the strike price for your options. That price, times the number of shares is the amount of money that you could potentially spend on this.
It would be useful to know what the current strike price is as well (if it is meaningfully larger than your strike price you options are already technically worth something, even if there is no market to sell them)
Good luck!
posted by milqman at 6:05 PM on July 14, 2009
-They may have thought that you were asking how many unallocated options were still available (something they may want to keep secret to keep you from negotiating into their incentive pool)
-They should have no problem tell you about the "Stock Plan" which should contain all of the information you need. They should not hesitate to share the number of existing shares in the stock plan. As an option holder, you should be privy to this knowledge. If they indicate otherwise, then they are either ignorant or giving you the run-around.
-The price that is on your "Incentive Stock Option" sheet is the strike price for your options. That price, times the number of shares is the amount of money that you could potentially spend on this.
It would be useful to know what the current strike price is as well (if it is meaningfully larger than your strike price you options are already technically worth something, even if there is no market to sell them)
Good luck!
posted by milqman at 6:05 PM on July 14, 2009
This thread is closed to new comments.
As for whether you actually want to do that or not, you should ask:
-how many shares are in the stock plan?
-how many types of stock are outstanding?
-what is the liquidity ratio (or preference) of the various stock types?
-what was the option's last valued strike price? (this probably has to be done every 12-18 months, and chances are that your options are older than that)
If your type of stock (probably common stock) is not subject to that terrible a preference, and the option valuation has been increasing above your strike price that is probably a worthwhile purchase for you if you have the funds to do it. That goes double if you think the company is successful and you expect it to be purchased.
If these things are not true, then you may not want to buy the options at all.
In summary:
What you have now is not stock, but an option to buy stock at a certain price. It is unlikely that there is a market for selling this stock should you choose to buy it. The market will open when or if the company IPOs or is acquired. At that point, the stock plan is likely to end and all of the shares will be paid out according to the market or acquisition price.
posted by milqman at 4:07 PM on July 14, 2009