equity, stock-optionsI recently signed on with a startup who offered salary and an options package, along the lines of "40,000 options** valued at $50k today...".
My exercise (strike) price per share was around $1.25 before.
Today we were notified we’re benefitting from a decreased strike price to $0.30 (Exercise price per share), with not much other context.
I don’t understand enough about options to evaluate this, other than the fact that a cheaper strike price sounds good to me. What would cause a strike price to drop? I’m assuming a reevaluation of the market value of the company (for better or worse). I opted for more equity than salary so this means a lot to me.
Note: My package is standard 4-year vesting w/ 1 yr cliff, so I’m not even a 1/4 vested yet.
The strike price (or exercise price) for an employee stock option is the price at which an employee can choose to purchase a specified amount of company shares. The lower the strike price is from the market price, the greater the profit for the employee. The higher the strike price is from the market price, the greater the loss for the employee.
When an ESO is granted, the strike price cannot be changed. In order to “change” the strike price, the previous ESO is canceled and a new contract is written. A company cannot lawfully raise the strike price of an ESO without employee consent, excepting a reverse split, a financial maneuver that reduces the volume of outstanding shares by some multiple, and raises the price accordingly; reverse-splits are often executed in order to reach a minimum value for an IPO. In these cases, the strike price would increase by the multiple of the reverse split (a 3 to 1 split would alter a strike price of $20 to $60).
A company can lawfully lower the strike price without employee consent because a lower strike price is always in the interest of the employee. This practice is seen unfavorably by investors, who are unable to renegotiate their buying price.
Companies often lower strike prices if the market price falls considerably because employees would not buy-in on their options if they are above the market price. In these times of market volatility, a company likely will exchange the initial strike price for the new, lower, market price to keep employee options above water.
While I don’t know the specifics of the situation, and there might be some circumstance I’m not accounting for, my speculation would be that the market value of your company (or the value of the company’s last round of funding) was around $0.30 a share and so they adjusted their ESOs accordingly.
Hope this helps!
It is likely that your company just had a 409A valuation performed. This is generally a 3rd party analysis that assigns a formal market value to your company (or if your CFO has the expertise this can also be performed in house). Without specifics there is no way to know what lowered your company’s market value.
Based on the number of options you were provided, it sounds like the company strategy is to keep salaries on the lower side while providing higher upside on options. That would make sense for them to lower the strike price for employees.
If your company’s market value falls below the strike price, then employee options are underwater and become worthless. So if your company had a liquidation event, was sold to another company, or went IPO at $0.30 per share then your options are still worth zero.
What many companies do at year end is provide an employee snapshot, or provide an online tool (you can ask for this info if not provided). This shows total number of options, and number of vested and unvested options. This is designed to show employees what their shares would be worth at current market value, or allow you to enter your own guess if things take off. This keeps employees excited and engaged - which is the point to providing options.
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