Year End Newsletter - Stock Option Counsel, P.C. - Winter 2022
Hello Startup Community!
Thanks for another fascinating year in the startup space. 🥂 Happy Holidays & Cheers to 2023 🥂
In today's newsletter, we have a weather report on 409A valuations and a quick primer on evaluating startup equity offers.
409A Valuations. Pitchbook published a fantastically nuanced piece on recent 409A valuations coming in lower than the prior 409A valuations. This reflects one force of the market shift - startup valuations changing based on those of comparable public market companies - as well as, perhaps, another - startups' ability to hit their own revenue targets and other key metrics.
Pitchbook notes that different companies are responding to these lower 409A valuations in different ways, including:
Lowering their FMV (which would be the expected result) so that their future option grants would have a lower strike price and existing option holders would have a lower tax bill for exercising options
Ignoring the lower 409A valuation and choosing not to adjust their FMV to "keep morale strong"
Repricing underwater stock options based on the newly lowered FMV
As the broader market shifts, the expectations of players within the startup space are starting to adjust as well. The most recent preferred price/share may no longer be a good proxy for current common stock value for candidates evaluating offers or for buyers and sellers on the secondary market.
Evaluating a Startup Offer. If you're a candidate new to the startup world, the Wall Street Journal would say that you are not alone as startups take advantage of the recent shift in the market for talent. As one founder noted, "A few years ago, there was no way we could’ve attracted candidates like this."
If you're evaluating a startup offer for the first time, here's a few resources to get you started:
The Gold Standard of Startup Equity provides three criteria for evaluating a startup offer:
Does the number of shares balance the risk I'm taking?
Do I keep my vested shares if I leave the company?
Is the equity structured favorably from a tax perspective?
Looking to Join a Top Startup? discusses:
How to evaluate the number of shares in a startup offer
The key contract terms that affect the value of a startup equity offer
Our three-part series on option exercise strategies illustrates:
Why you need to have an exercise strategy in place before signing an offer letter
The menu of choices for stock option exercise strategies and
Frequently asked questions about the menu
Good luck!
Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and blog. 🥂 Happy Holidays & Cheers to 2023 🥂
Best,
Mary
Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
(650) 326-3412 | mary@stockoptioncounsel.com
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
