Quote:
Originally Posted by maxtower
Whenever a company does a round of investment, a valuation is created. Usually your hire-in options will be based on that valuation. So if you start the day after an investment round, your options will be worth about $0. You need the company to continue growing (and eventually have an exit event) to cash in.
In contrast, RSUs typically have some value the day they are granted but you have to wait some time to cash-in.
I’m not as familiar with RSUs, but this isn’t true for options (at least in jurisdictions I’m familiar with).
Shortly after an investment round there are two important numbers. There’s the price paid by investors per share. This is going to be higher than the per-share value of your options because they’re getting preferred shares with a bunch of extra advantages (like protection of their capital or return, different forms of control, etc.).
There’s also the 409a valuation (or equivalent) that is the value as assigned for tax purposes and it’s almost always very pessimistic and generally doesn’t take into account potential, market conditions, etc. This is usually the exercise price of your options. But this is almost always less than the expected per-share value of your shares.
Basically if a company exited shortly after an investment and shortly after you were granted shares (ignoring vesting) you would generally make money even if the company didn’t grow.
Edit: And obviously this assumes fairly standard conditions on the preferred shares. If it was a tough raise the new investors might have things like ratchets that cause them to get a bunch of money and common shares to get nothing.
There’s lots of complexities here but it’s kind of amazing how little people generally understand about this when it can make up a large percentage of their real or perceived compensation.