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Ask HN: Need help in understanding private equity offer

by imheretolearn on 5/30/22, 2:11 PM with 30 comments

Hi,

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

  • by thoughtstheseus on 5/30/22, 3:29 PM

    The $70 billion valuation is suspect. Far too high for nearly all early stage companies. SpaceX raised last year (?) around $100 billion for reference.

  • by stouset on 5/30/22, 4:48 PM

    Given the extremely suspect numbers here, your friend should assume they are receiving $0 in equity.

  • by brudgers on 5/30/22, 8:24 PM

    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.

  • by abrichr on 5/30/22, 2:36 PM

    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].)

  • by ericbarrett on 5/30/22, 3:03 PM

    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.

  • by rkk3 on 5/30/22, 3:40 PM

    > at a valuation of $70B.

    > it is a very early stage startup.

    One of these does not fit.

  • by s1artibartfast on 5/30/22, 4:19 PM

    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...

  • by retube on 5/30/22, 2:34 PM

    Impossible to answer without, at a minimum, knowing how many shares have been issued.

  • by _256 on 5/30/22, 2:40 PM