Editor’s note: A version of this question originally appeared on Reddit.
I joined a small startup 8 months ago and signed a stock option agreement that gave me $100,000 in stock options vesting over 4 years.
Today, the company received a 409A valuation that was considerably lower than what we thought it was going to be. The founder said it was an aggressive move to maximize our equity value, which makes sense.
However, this put me in a spot where my equity percentage amount would be much more than originally thought, so the company wants to amend our employee agreements, and give us 19 percent of our original signed contract’s value. Where I would have originally received $100,000 in stock options, they now want to revise that to $19,000 in stock options, with the same vesting schedule.
If I don’t sign the revised agreement, I’m assuming I’ll be fired. I won’t get any stock options at all, because I haven’t hit my 1-year cliff. If I do sign, it feels like I’ll be taking a big haircut in stock option value.
I want this to be fair for everyone, but it doesn’t feel fair to me. Does what they propose make sense? What am I missing?
You’re certainly in an unusual situation. It may be prudent to consult an employment lawyer who can take a closer look at your contracts. You’ll want to share the original equity grant agreement that you received or signed, including your offer letter, as well as the new agreement. It’s a good idea to know exactly what your options are, and what the potential consequences could be for refusing to sign.
I don’t know the specifics of your situation, but I can speculate on a couple of possible scenarios as to why the 409A valuation (also known as fair market value) is now lower, and what that might indicate. Depending on your situation, these might serve as helpful context as you decide how to move forward.
The big unanswered question: Has the company raised outside funding at a specific 409A valuation, or is it pre-funded and this is their first 409A valuation?
Depending on the answer, I can see a couple scenarios — good, bad, and terrible.
Good scenario: You were originally granted (for example) 100,000 shares at a $1 strike price, granting you the equivalent of $100,000 in stock option value when you joined the startup.
They’ve performed their first-ever 409A valuation, and found that the company is worth considerably less than originally expected — for example, they hired you on the assumption that the company was worth $10 million. Now, they believe the company is actually worth $1.9 million.
In this scenario, you’re still earning 100,000 shares, but now your strike price is revised down to 19 cents per share. That means you can acquire your shares for less money, while still retaining your original ownership stake in the company.
Bad scenario: When you joined the company, they didn’t tell you how many shares you were earning, or a specific strike price — just that your stake would be worth around $100,000.
Very early-stage, pre-funded startups can sometimes make mistakes like this, and open themselves up to legal challenges from early employees.
Here, you’re stuck between a rock and a hard place — do you insist that $100,000 is $100,000, no matter the company’s valuation, and threaten to sue? Do you try to negotiate for more equity and find a happy medium with the founder? Or do you chalk it up to inexperience all around, and sign the revised agreement?
Here, it might make sense to take a longer view: Is this a company you think has a good chance of eventual success? Do you trust the founder? Do you like the product?
Worst-case scenario, you lose your job and get tangled up in a legal battle with a virtually worthless startup. Either way, this is a tough scenario to find yourself in.
Terrible scenario: The company has raised funding previously, at a specific 409A valuation. Now, something’s happened at the company that’s caused it to lose a significant amount of value. Their seed-stage investor, who might have put in $1 million to get the company off the ground, now finds themselves holding the equivalent of $190,000 in value.
This isn’t a great sign — at a startup, you want to see the value of the company rising, not falling.
- Vieje Piauwasdy, Senior Director of Equity Strategy, Secfi
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