You have stock options, but, well, it is kind of a crappy company and now you are gone and you have to decide whether to spend that 5 grand to buy them.
Should you buy those options?
You tell your partner or spouse, “I do not really know if I want to spend the dough, the place is a loser and has not made a dime in 5 years.”
“The CEO is clueless, the sales team is in constant turnover, they are discounting to make every deal, the market looks small, everyone thinks the place is toxic and many are looking for another job.”
Sound like your gig?
Fortunately your partner, or spouse has some experience and they set you straight.
There is little correlation between employee options and the quality of the company.
Because there is someone who is more screwed than you—the VC who invested in this dump! This is the only time, literally the only time, you will ever be on the winning side with a VC involved in a crappy deal.
You can be really sure the VC is going to get all of their dough out, or almost all of it by selling this piece of crap to some other buyer who has even less intelligence than they have. And you, dear employee can be the beneficiary.
So let’s go through the thinking here.
Of course, this is not meant to be investment advice and you should always talk to your investment professional before making any kind of purchase. But, since I have been in some really ugly companies we were trying to turn around, always with options, I have some experience in this matter.
Employee options are priced at pennies per share. Usually less than a quarter and always less than the least expensive Starbucks small latte per share.
There is probably massive dilution. If the company is on a C, D, E F (after that it does not matter as they are likely dead) round, the VC has one, and only one goal. Get the f*** out. And they are going to get out no matter what.
VC’s play games you are not privy to.
They help each other out with crappy investments. I have seen one VC take a very bad deal on an F round only because they wanted to be in on the B round for a very hot deal. You do not see that stuff.
Why do you need another VC in a round?
Because the incumbent VC cannot “establish value” for the round. They need a new VC to come in and value the company at some price to which they can then value their portfolio to show their investors. And they need to show those investors an upward trajectory because they are probably shaking them down at that very time for another investment round for the next fund.
The new VC then comes in, agrees to some valuation that solves everyone’s problems and then gets paid off later with access to a deal they could never have gained access to themselves.
Crap VCs have a strategy of helping bail out a top VC to get access to A Level deals.
You just need to know it can happen, and you can win—well, not really win–nobody wins building a career at third rate companies, but you can get a nice vacation out of it.
I have seen some major companies, (you have used their computers) buy into a crappy deal, take it off the table to save a VC bad investment, only to be able to be part of a very hot new deal they had no chance to participate in.
Not all deals are bad. If you are in Atlasssian, Browserstack, Survey Monkey or other deals where they did not bring early venture capital in, you are going to do very well.
The problem for an employee in a really bad deal, particularly after one has departed, is the company will almost never tell you the DENOMINATOR of your options. You have 10,000 shares—but 10,000 out of a million or 200 million. I assure you, it is likely the latter.
If it is 200 million—and that is pretty common–actually low for an E, F G round company, you may get a nice vacation to a B destination, flying coach. But, what the heck? Take it.
Unfortunately the employee, or former one, will never hear what the real denominator actually is. Ask the CEO. “Hey Jack, so if I have 10,000 shares, how many total shares are out there?”
This is scumbag identification time.
That CEO who talks slowly, uses investment words, comes to your cubicle to tell you how much your work is appreciated, gives out the “MVP of the Whatever” plastic plaque, conducts 2-3 company meetings a week so everyone can “know what we are doing and where we are going” will never tell you just how screwed you are.
They know the exact number. When they are bored, they divide what they think the purchase price is (no IPO for a E, F, G company) divided by their shares—to see how much they are going to make on this crappy deal.
But tell you? Never happen. Be happy with the free lunch a couple of days a week and the plaque.
But your shares are only a dime or a quarter. So almost whatever the denominator is, you will get something. Not much but something is better than nothing.
And in your corner stands a desperate VC, with some pals who also have desperate investments. And they whisper to each other—“help me out of this crappy one and I will get you into this great one we have coming up.”
Welcome to the only time you will deal with a low tier VC and come out ahead.