So now that you hopefully have a general sense of how to value the company (notice I didn’t say your shares), let’s talk about what you’re actually getting. In most cases, companies will offer you options (ISOs or NSOs) or some equity instrument that vests over a time horizon. So, depending on the stage of the company, you probably want to determine what percentage of the company you own (earlier stage companies) or what the dollar value of your shares if a liquidation event were to occur (later stage companies).

Here’s our again non-exhaustive list of questions:

Question #1: What share count (or equivalent thereof) am I getting?

This is going to be your numerator in most percentage based calculations

Question #2: On a fully-diluted as-converted basis (including any conversions of warrants, convertibles, SAFEs, option pools, etc), what is the share count of the company?

This is a conservative (though not overly) assessment of denominator in a percentage based calculation. In the case of the option pool, it assumes that the company decides to issue all options prior to a liquidation event. If it doesn’t your percentage ownership would be increased by 1/(1-X%) where X% is the remaining equity pool.

Question #3: What is the legal entity of the shares I am getting? Is this the same entity that all of your investors invested in? Please provide a structure diagram with all affiliated entities

This question is to make sure value isn’t being accrued elsewhere or being siphoned out without your knowledge. As an extreme example, a company could have a holding company that owns the IP you create and do not own the equity shares of. Alternatively, they could form a joint venture with a separate entity that transfers value out of the company.

Question #4: What share class am I getting or do my options, once exercised, convert into? What other share classes are there? What share class do the founders own?

Generally you should receive common shares (or the equivalent) but it’s important to understand what share classes are in the capitalization stack and therefore, different interests in the company. If the founders own the same share class as you, they’ll be more likely to maximize the outcome that best benefits your share class (see next part for more context)

Question #5: How much do I get paid out in the situation where the company liquidates for the valuation you just described?

People can come up with complex structures where your payout is extremely dependent on the exact circumstances but this is probably the easiest question to ask to determine something close to the true “dollar” value of your option at the moment. Note, it’s important to note that the value of your option is slightly greater than that due to the volatility and future optionality but it’s good for understanding how the company’s liquidation waterfall works (see option theory for more details).
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The point of these questions is to highlight many of the ways you can get screwed by not understanding what you actually will be owning. It’s easy to be “lazy” and blindly assume that the other employees/investors in the company have done the work and diligence. (See TopTal’s case as a great example) However, given your time is precious, it’s important to ascertain as much as possible and make sure the work and effort you put in for the next couple of years isn’t rendered to zero. So for your own sake, please do your due diligence.

Andrew Wang
CEO of Valon
Ex-investment and mortgage professional at Soros
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Allen Li
Senior Software Engineer at Valon
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