Venture Hacks has a great article on questions you need to ask when negotiating your compensation at a startup company.
- Can you give me the offer in writing?
- How does my compensation compare to my peers in the company?
- What are my options worth?
- What percentage of the company do my options represent on a fully diluted basis?
- Can I exercise my unvested options early?
- How much money do you have in the bank right now? How long will it last?
- What was the company’s post-money valuation in the last round?
- What are the investor’s preferences?
- Who is on the board and whom do they represent?
- Would I hire the CEO and the board to increase the value of my options?
There was a disclaimer on the fifth question,
This is for advanced Venture Hackers only. Don’t do this without an accountant and/or lawyer.
The Venture Hackers were coy about why an accountant and/or lawyer is necessary. In this post, I’d like to share my own early exercising story.
Why is early exercising options dangerous?
In 2000, I early exercised my options in Tellme Networks shortly after going to work there. At the time, Tellme was one of the hottest startups in the Valley. It had raised $250 million and we were mentioned in the news almost daily. Our CEO, Mike McCue, was on the cover of Worth and had been featured on 60 Minutes. We all thought we were going to be rich and expected an IPO in a year or so. To avoid paying short term capital gains taxes, few of us passed up the “opportunity” to exercise our options early. Some people (thankfully, not me) invested a disproportionate amount of their savings into the company to avoid what were expected to be hefty taxes.
So there I was, stuck with a chunk of stock in a company that had gone from peak to trough in 18 months.
Then 2001 came along. The economy got worse. Tellme went through one round of layoffs and then a second. And finally, 9/11 kicked the company in the teeth. We were just beginning to work with airlines, but that fell apart because of the uncertainty in their industry. When I left the company at the end of 2001, I wasn’t even half way through my vesting period, but the company refused to buy back my unvested stock. I can’t blame them, I’m sure they wanted to conserve cash going into a down cycle of indeterminate length.
So there I was, stuck with a chunk of stock in a company that had gone from peak to trough in 18 months. I spent the next several years wondering what would happen, and trying to keep up with the company from my new location in Texas. Occasionally I’d see Tellme show up on a “Hot IPOs” list, but nothing ever came of that. Finally, in the spring of 2007, almost seven years after I purchased my stock, Tellme started buzzing again. There were rumors of a buyout by Microsoft or Google, and then, finally, the big announcement that Microsoft had bought the company.
The lesson is: don’t early exercise more than you’re prepared to lose.
I lucked out. I earned a respectable (but not life-style changing) IRR. If Tellme hadn’t had that enormous war chest to take it through the tough times, however, I could have easily lost my entire investment. The risk of losing it all is compounded by investor preferences. The lesson is: don’t early exercise more than you’re prepared to lose.
One more point, I give Mike McCue a lot of credit for sticking with the company and seeing it through to the finish. This speaks to Venture Hacks’ question 10: do you trust the CEO to increase the value of your options? I hope I’ll some day get a chance to buy Mike a beer and say thanks.