Do you have options in Startup? I made a memo that explains in native language exactly what they are and when they are valuable. In addition, information on how startup valuations arise, etc.

Last time, I posted a whole 45 min video that explains in detail how startup valuations are created, what is the basic information on whether and when options are valuable. The only comment and downvote was that there should have been a memo. Fine. For those who can’t be bothered to watch the long video, here’s a memo.

If it’s not relevant to you, ignore it. If you know someone who has it, share it with them.

A more in-depth video explanation is here: https://www.youtube.com/watch?v=8qOLCF3pqoA&list=PLWCa77RPoTQxmFg9eD6rYbcbIgXp8tmGA

Why do I want to explain this?

This is an important topic for me, because I know how many employees in startups (including even founders) have options and don’t know anything about them. Then the startup makes a multi-million exit and you are left empty-handed. Why?

I try to educate and explain what one might know.

If I have an option, what do I really have?

Sul on right (option) buy X number of company shares in the future at a predetermined price.

Your option contract specifies how many parts you can buy and what their price is.

A standard option template can be downloaded here: https://startupestonia.ee/model-documents/ (Option Agreement)

Clause 1.1.2 says several parts. Point 1.3.2 says at what price.

What is the difference between equity and options?

If you have a direct share, you are in the business register and you really own these shares.

If you have options, you only have the company’s promise to sell them to you in the future, but nothing else. It is legally binding and there is no need to worry that the contract will lose relevance or that no one will fulfill it.

When do options become direct equity?

Then if you Excercise’d your options, perhaps "you buy out".

When can I convert my options into real shares?

Then, when you have filled Excercise conditions. They are outlined in template 1.3.

90% of the time in 2 cases: 1) when the company is sold. 2) When the date specified in the contract arrives.

The prerequisite is that you have completed your vesting period.

Mis on vesting?

Usually, the shares are earned over usually more than 4 years. The first year gets nothing. At the end of the first year, you will be entitled to 25% of the shares you were promised. Then every month in equal parts until the end of the 4th year.

What Does Buying Out Options Really Look Like?

Case 1: When Exit occurs

There is usually a form at the end of the option contract. You fill out the form and send it to the founder. There you say that I want, for example "Buy 20 parts at a predetermined price of €100 per part" (if your option contract stated that you will get 20 shares at a price of €100 per share.)

Then automatically after buying them out, you resell these parts to the buyer at the price of the part specified in the contract for the sale of company parts (Share purchase agreement). You don’t have to do anything. You do not have to have this money (€20×100), but it is automatically deducted from the sale price. If the price of a part was set at €600 at the time of the sale of the company, you buy out the parts for €2,000 and automatically sell (20×600) for €12,000. You get €10k income. Income tax deducted.

Case 2: The date arrives:

You can buy out all your parts, but then you have to have the money. You fill out the application, transfer the money. You go to the business register. You now have 20 shares of the company.

Why buy out parts when the date is here?

If it is a very famous company (eg Bolt, Lightyear etc), then it is very much market to these parts. You can probably sell these parts on to others. If you currently have earned shares in Bolt, I’m sure you can cash them out now if you want. The exact conditions are obviously both in the bolt shareholders agreement and in your option agreement, but that’s another topic.

Second, if you are a shareholder, you will receive dividends. Irrelevant 99% of the time because such companies will not pay dividends.

The risk is that these parts will end up being worthless. It is pointless to buy out unless it is a very strong company.

When can you "over with options"?

If the price of the part specified in your contract is lower than the price of the part specified at the time of purchase.

When they got the option contract, they said that "we give you 0.8% of the company in options". At that time, the share capital was 2,500 shares, of which 0.8% = 20 shares.

The share capital of the company grows as investments to, for example, 10,000 shares and is sold for €1.5M, then the price of one share is €150. You buy options for €2,000. Selling for €3000. You get €1000 profit. You pay €222 to the state. €772 remains.

If you calculate (incorrectly) in percentages, you can think that I get 0.8% of €1.5M = €12,000 minus income tax = €9,360. In reality, you get €772.

Couldn’t get over it. Just don’t calculate never in percentages only in parts.

Mis on red flag?

If the company’s valuation is inflated / includes an absurdly large amount of money without a real product (eg Single earth) or if the company raises almost all of its investment through crowd-funded platforms (eg Funderbeam), then your probability of getting money from options decreases radically.

95% of the time, if the company is sold at a lower price than the last round’s valuation, you get nothing. eg The company raised the last round with a value of €100m, but sold itself for €50m. You will probably be left empty-handed. The reasons are Liquidation preference and other clauses in fund contracts.

It is now also in the form of a memo. I hope that people will bother to pay more attention to their option contracts and know how to evaluate their real potential.

Antitype: Options shouldn’t/shouldn’t be that last rebuttable reason to join a company. If you don’t want to join without options, don’t want to join with options either. If you want to join without an option, they are a good potential motivator.