Evaluating stock option offers

Ben Kuhn has a great post about evaluating startup stock option offers. Here’s Ben’s list of questions you should ask.
  • If I leave or am terminated, when do the options expire?
  • How many shares is the offer, and how many shares in the company are outstanding?
  • What were the investment terms of your funding rounds? (Amount invested, post-money valuation, and any liquidation preferences or other protections)
  • Is vesting four years with a one-year cliff or something else?
  • Do you offer early exercise?
  • What’s the strike price of the options?
  • Are they ISOs or NSOs?
One issue with Ben’s list is that it focuses on evaluating the options rather than evaluating the company. From the outside it’s quite hard to tell the difference between these two companies:
  • Company A: Raised a $10m Series A two years ago. They’ve been absolutely crushing growth, their churn is low, their monthly burn is small. They’re clearly past the benchmarks to raise a Series B - and they don’t even entirely need it yet, implying they could raise at great terms.
  • Company B: Raised a $10m Series A two years ago. They’ve been struggling to grow revenue, and their monthly burn is large. They have a pretty short runway and given their current {revenue, valuation} it seems impossible for them to raise a Series B, unless one of their Hail Mary growth strategies work out.
You’d rather have options with mediocre terms at Company A than five times as many options with much better terms at Company B. It is in fact possible to disambiguate between Company A and B, with relatively few pieces of data. Here are the questions I would ask to distinguish between them:
  • Could you share your most recent pitch deck with me?
  • Could you share a couple of your most recent investor updates with me?
    • The core numbers you want are: revenue, growth, churn, burn, margin and cash in the bank. Feel free to ask for them separately if the founders balk at sharing the deck or investor updates.
    • The main signal you’re looking for is “high % YoY growth since the last round, with reasonable runway, margin and churn”
A framing that helps make these uncommon requests sound more reasonable: “I’d love to work with you for the long haul, and I realize this will mean that the vast majority of my total wealth will be tied up in Company A stock. Hence I’d love to treat this decision with the weight it deserves and be informed about the state of the company before I accept your offer”
Companies may refuse to provide these numbers - which could be a sign that they’re performing poorly. Companies with great metrics are more likely to share, and they often even tweet about their revenue numbers to attract talent.
Other than figuring out company value, one other option-related question Ben Kuhn misses in my opinion is:
  • Has your company held employee secondaries in the past, and do you expect to in the future?
This isn’t as much of a guarantee as a contractual obligation, but getting a sense of the overall philosophy can be helpful as early employee secondaries get more common. Stock options with frequent liquidity events are worth significantly more than those without.
So, here’s my list of questions, combined with what I consider the best ones from Ben, roughly in order of importance, for an early-stage startup:
  • Could you share your most recent pitch deck with me?
  • Could you share a couple of your most recent investor updates with me?
  • If I leave or am terminated, when do the options expire?
  • Has your company held employee secondaries in the past, and do you intend to in the future?
  • How many shares is the offer, and how many shares in the company are outstanding?
  • What were the investment terms of your funding rounds? (Amount invested, post-money valuation, and any liquidation preferences or other protections)
The rest of Ben Kuhn’s questions are useful, but that data is usually given to you with an offer. You should ensure you get the data, but it’s usually unlikely to dramatically change the value of the options. Most companies make pretty standard decisions there and let you know if and when they deviate from them.
Hence, the main things that IMO, dramatically change the value of options are company health, post-termination exercise window and founder + VC propensity for secondaries. (And of course, how much of the company you’re actually getting!)
 

Evaluating stock option offers

Ben Kuhn has a great post about evaluating startup stock option offers. Here’s Ben’s list of questions you should ask.
  • If I leave or am terminated, when do the options expire?
  • How many shares is the offer, and how many shares in the company are outstanding?
  • What were the investment terms of your funding rounds? (Amount invested, post-money valuation, and any liquidation preferences or other protections)
  • Is vesting four years with a one-year cliff or something else?
  • Do you offer early exercise?
  • What’s the strike price of the options?
  • Are they ISOs or NSOs?
One issue with Ben’s list is that it focuses on evaluating the options rather than evaluating the company. From the outside it’s quite hard to tell the difference between these two companies:
  • Company A: Raised a $10m Series A two years ago. They’ve been absolutely crushing growth, their churn is low, their monthly burn is small. They’re clearly past the benchmarks to raise a Series B - and they don’t even entirely need it yet, implying they could raise at great terms.
  • Company B: Raised a $10m Series A two years ago. They’ve been struggling to grow revenue, and their monthly burn is large. They have a pretty short runway and given their current {revenue, valuation} it seems impossible for them to raise a Series B, unless one of their Hail Mary growth strategies work out.
You’d rather have options with mediocre terms at Company A than five times as many options with much better terms at Company B. It is in fact possible to disambiguate between Company A and B, with relatively few pieces of data. Here are the questions I would ask to distinguish between them:
  • Could you share your most recent pitch deck with me?
  • Could you share a couple of your most recent investor updates with me?
    • The core numbers you want are: revenue, growth, churn, burn, margin and cash in the bank. Feel free to ask for them separately if the founders balk at sharing the deck or investor updates.
    • The main signal you’re looking for is “high % YoY growth since the last round, with reasonable runway, margin and churn”
A framing that helps make these uncommon requests sound more reasonable: “I’d love to work with you for the long haul, and I realize this will mean that the vast majority of my total wealth will be tied up in Company A stock. Hence I’d love to treat this decision with the weight it deserves and be informed about the state of the company before I accept your offer”
Companies may refuse to provide these numbers - which could be a sign that they’re performing poorly. Companies with great metrics are more likely to share, and they often even tweet about their revenue numbers to attract talent.
Other than figuring out company value, one other option-related question Ben Kuhn misses in my opinion is:
  • Has your company held employee secondaries in the past, and do you expect to in the future?
This isn’t as much of a guarantee as a contractual obligation, but getting a sense of the overall philosophy can be helpful as early employee secondaries get more common. Stock options with frequent liquidity events are worth significantly more than those without.
So, here’s my list of questions, combined with what I consider the best ones from Ben, roughly in order of importance, for an early-stage startup:
  • Could you share your most recent pitch deck with me?
  • Could you share a couple of your most recent investor updates with me?
  • If I leave or am terminated, when do the options expire?
  • Has your company held employee secondaries in the past, and do you intend to in the future?
  • How many shares is the offer, and how many shares in the company are outstanding?
  • What were the investment terms of your funding rounds? (Amount invested, post-money valuation, and any liquidation preferences or other protections)
The rest of Ben Kuhn’s questions are useful, but that data is usually given to you with an offer. You should ensure you get the data, but it’s usually unlikely to dramatically change the value of the options. Most companies make pretty standard decisions there and let you know if and when they deviate from them.
Hence, the main things that IMO, dramatically change the value of options are company health, post-termination exercise window and founder + VC propensity for secondaries. (And of course, how much of the company you’re actually getting!)