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I'm considering working with a startup (not public). As part of my package they have agreed to grant me a 1% stake in the company over 4 years vested every year. This means that if I left after 2 years I would have .5% of a stake vested in the company. When I asked if I would have to put up any of my own money if I left early in order to keep my .5% stake in this example they said that I would have to purchase them based on their current "valuation" of the company.

So in this situation they "value" their company at $100,000,000. In order to get my .5% stake I would have to pay them: .005 * 100,000,000 = $500,000

Or I could decline and leave with nothing.

From what I understand their previous round of investment valued the company at much less than this - probably something closer to $5,000,000. The $100,000,000 figure is a valuation (somewhat optimistic imo) that they are attempting to achieve in their next round of funding.

I haven't worked with Stock Options before - only RSUs which seem much simpler. My question - is this standard operating procedure for Stock Options? If not - what is the correct way to calculate how much one would need to spend in order to keep their partially vested stock options when leaving a not-public company?

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    I'm voting to close this question as off-topic because it doesn't belong on this stack. Maybe try finance S.E? – solarflare Aug 21 '19 at 1:49
  • "if I left early in order to keep my .5% stake" Do you mean the vested .5% or the unvested .5%? – Gregory Currie Aug 21 '19 at 2:28
  • Which country is this – Neuromancer Aug 21 '19 at 22:48
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I believe there is a misunderstanding here.

This means that if I left after 2 years I would have .5% of a stake vested in the company. When I asked if I would have to put up any of my own money if I left early in order to keep my .5% stake in this example they said that I would have to purchase them based on their current "valuation" of the company.

In this scenario, there is a .5% vested component, and a .5% unvested component.

With your question to them, I believe they thought you were referring to the unvested component. If so, their answer makes perfect sense.

After 2 years, you own your .5% stake. That's the definition of vested. You don't need to pay for it.

The remaining .5% is owned by the company. If you want to make up the other .5%, you need to acquire it at the current valuation (just like everyone else).

If they thought you were referring to the vested component, it would be equivalent to all your shares vesting at 4 years, because to keep the shares, you would have to pay for them (just like everyone else). If they wanted you to enjoy the benefits of share ownership without the shares having to vest, they can be held in trust, where you have voting rights, and entitlement to dividends, but no entitlement to sell. So this doesn't make sense.

You need to keep in mind that shares are only worth what someone is willing to pay for them. Valuations don't matter if the shares are not liquid, unless you're in it for the long term.

My advice is to seek the advice from a professional to help you work through the offer before you sign anything.

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  • why does this stand downvoted? – mu 無 Aug 21 '19 at 4:30
  • @muç„¡ Presumably somebody disagree with what I've said. But it's not exactly a controversial opinion. – Gregory Currie Aug 21 '19 at 4:40
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    Yes, does seem like someone who doesn't understand how esops work :) – mu 無 Aug 21 '19 at 4:41

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