stock-optionsI’m currently working at my first startup (~20 people) out of grad school, and there were significant changes in my offered options from my offer letter until actually receiving them formally (through an online agreement by https://www.esharesinc.com/)
I’m trying to assess whether this is normal, or way out of line. I’m feeling pretty frustrated and distrustful of my startup’s leadership right now.
In my offer letter, I was given 18,000 stock options at $0.282 per share, vesting over 4 years with a 1 year cliff. The offer letter included the phrase “the price of your options may vary slightly if the company updates its share price between now and the time your options are Board-approved”.
I didn’t formally receive my stock options for 6.5 months. I asked a few times in the first two months where my options agreement was, but the CEO said he needed a board meeting to approve the options. I know there was a few board meetings from the time I started until I finally got the options. One detail that may be relevant is that the company closed a Series B a month after I received the options, so perhaps there was some sort of financial shake-up?
When I finally received the options, the amount and price was different from my offer letter, now at: 18,500 at $0.38 per share
I asked why there was a difference, and my CEO said the increase from 18,000 to 18,500 was to make up for the increase in share price. Assuming what he called a “409A price” (the supposed actual price the investors pay) of $4: (# of options)*(Share Price - Option Price) So, respectively:
This made sense to me at the time. I mean, this is my first time at a startup, and I am naive, so I’m implicitly trusting the startup leadership. The CEO assured me that what I got was actually better than the offer letter.
However, a few months later, after attending an info session, I put it together that that new option price is going to cost me significantly more money: Original cost: $0.282 x 18,000 = $5075.9 New cost: $0.38 x 18,500 = $7030.0
So, yes, I feel stupid at this point for taking a few months to realize this. I have an undergrad degree in math, but despise doing finances or taxes, so I typically let an accountant deal with it. And I typically err on the side of trusting people whose interests are supposed to be aligned with mine.
But what the leadership of my company did is change an offer to something of slightly higher value ($54 more! meh?) at a significantly increased cost (nearly $2000, wtf!?).
Questions:
0) Is there anything wrong with my calculations?
1) Is it normal to wait this long to get your options formally?
2) What requires the company to change the options cost? Why not offer the options at the original amount from my letter? It seems like they’re hitting up employees for fundraising. They don’t seem to be in a poor financial position.
3) Do I have a valid complaint here, whether or not there is legal recourse?
Right now, I’m looking for clarity before I bring this up with the leadership. I don’t feel trusting of them, and significantly outgunned.
Management might be correct. But you need more information to be sure.
However, one thing about your question is certain... your math is definitely wrong.
You are comparing apples (18,000 shares) to oranges (18,500 shares) obtained after you exercise your options by comparing the total cost of the purchase. That is not a correct comparison because you will have 500 more shares in the second scenario. That's why you want to use the per share cost in the first place.
You need to have them "show you their math." And make sure you understand every step in their calculations. Valuing options is complex math. With your mathematical background you might enjoy studying the Black-Scholes Equation just to get a feel for the complexity. (You have the call option flavor).
You might want to approach your HR person to ask the question. They are usually better at explaining policy and you can more likely trust them to be objective in dealing with you.
On the bright side, if the company is a success at all, the future value of the options should dwarf the differential you might be short given the numbers you describe.
One more tip, if you find you are due anything, negotiate for more options instead of a reduced price. There is unlimited upside potential in the value of more options; whereas there is a fixed maximum value to a reduced price. The former should hopefully be orders of magnitude more significant than the latter.
So get them to show you their math then report back here and let us know what they say.
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