May 22nd, 2011

Need help understanding stock and options? Here’s a cheat sheet for entrepreneurs and startup employees


Need help understanding stock and options? Here’s a cheat sheet for entrepreneurs and startup employees

In the world of startups, “stock,” “options,” “equity,” and “liquidity event” are bandied about pretty freely. But given that—as an entrepreneur or an employee at a startup—they greatly affect your livelihood and the value you’ll derive from contributing to a startup, it would probably make sense for you to understand exactly what those terms mean, wouldn’t it?

It would. And that’s why is was nice to find this cheat sheet, An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee.

Intro to Stock and Options

That’s right. They even cover Convertible Notes. It’s really a solid overview.

Although it is missing one valuable piece of startup advice. I didn’t really see any guidance on what to do when that stock and those options all go south. If you need to talk about that, I’ve got more than enough experience to share in that regard.

(Image courtesy Anamolous4. Used under Creative Commons.)

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Background that may help (or may not)

9 Responses to “Need help understanding stock and options? Here’s a cheat sheet for entrepreneurs and startup employees”

  1. Mark Lawler says:

    Great post! One thing I’ve always found somewhat humorous is when somebody comes to me to tell me how many options they received as part of a job offer. Often they have no idea if they are preferred or common shares or where the cliffs are. Even worst almost always they know the number of shares but cannot tell me what %-age of the common shares theirs actually represents. Who cares if you have 10,000 shares if that’s only .0000025% of the shares out there? You’ll see more reverse splits and adjustments than a gymnastics team on a world tour by the time anything meaningful happens. Most are not happy at a liquidity event as their expectations for a payoff was up in the stratosphere as they couldn’t do the simple math to compute what their options would be worth based on common offerings as a multiple on trailing 12 month revenue… I wish more folks treated them for what they are: lottery tickets, and more often or not at the scratcher level vs. Powerball level…

  2. Hi! I’d love to amend the document to include good advice about what to do when things go south. Would you like to join me as an editor at http://stocks.pbworks.com/?

  3. Rick Turoczy says:

    David,

    Most of my knowledge is purely anecdotal. Not sure how much it would help. It would probably just be whining ;)

    But I think a discussion of how to write off losses over time would be extremely helpful for folks who have purchased stock, especially when that purchase is tied to their compensation through employee stock purchase programs.

  4. Naomi Derner says:

    A great article with lots of valuable info, thanks Rick.

    In defense of providers of 409a valuation, while I’m sure that some of the providers are “the most unimaginably braindead accountants you can possibly imagine,” there are good providers out there who understand early-stage companies. I think if companies spend a little extra time finding a provider that understands their business and the unique challenges faced by startups, the experience does not have to be unpleasant, disappointing or too time consuming.

  5. Thanks for posting this. My hubby works for a start up in Hillsboro– so I will share this helpful info with him asap! Thanks!!

  6. FYI, I just published a Second Edition of this guide (visible already in the embed above). Sadly, I was not able to ask a lawyer about the best way to factor in stock that goes to zero (sorry, Rick), but maybe in the next edition!

  7. [...] Need help understanding stock and options? Here’s a cheat sheet for entrepreneurs and startup empl… (6) [...]

  8. And FYI, a 3rd edition is now live (and, huzzah, properly embedded above!)


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