What I Wish I'd Known About Equity Before Joining a Unicorn
I am just an engineer. I don&#x27;t understand a lot of the terms and concepts necessary to understand the linked article. I tried going through the Wikipedia articles for the terms I was interested in but I don&#x27;t think I can make sense of it all without a kind teacher to help me out. So here I am turning to you, HN, to be my teacher. Here are the questions I have. If one of you could answer just one question from this list, it would help me a lot. I am sure it would help other people like me.<p>While answering, please quote my entire question with the Q&lt;number&gt; so that people don&#x27;t have to scroll up and down to correlate the answers with the question.<p>Q1. Quote from article: &quot;Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised.&quot; My question: What is strike price? If I have accumulated say $30K worth of options, but I can afford only $10K, can I buy only $10K worth of options while leaving the startup?<p>Q2. Quote from article: &quot;Due to tax law, there is a ten year limit on the exercise term of ISO options from the day they&#x27;re granted. Even if the shares aren&#x27;t liquid by then, you either lose them or exercise them, with exercising them coming with all the caveats around cost and taxation listed above.&quot; My question: Say I get buy ISO options for 30000 options for $30K from a startup while I leave the startup in 2017. Say, that startup still remains private in 2027. What are my options? Am I going for a total loss of $30K? If the startup hasn&#x27;t gone IPO, how can I possibly exercise my 30000 options in 2027? What does the article mean by &quot;exercise them&quot; in this case? Does &quot;exercise&quot; mean buy the 30000 options for $30K or does &quot;exercise&quot; mean selling the options for a possibly larger price after the startup goes IPO?<p>Q3. Quote from article: &quot;Some companies now offer 10-year exercise window (after you quit) whereby your ISOs are automatically converted to NSOs after 90 days.&quot; My question: How is NSO different from ISO? When the article mentions that NSOs are &quot;strictly better&quot; does it mean that I don&#x27;t have to pay a penny to buy the NSOs but they remain in my account for free?<p>Q4. Quote from article: &quot;Employees want some kind of liquidation event so that they can extract some of the value they helped create&quot; My question: What are the events that count as liquidation events?<p>Q5. Quote from article: &quot;Even if you came into a company with good understanding of its cap table&quot; My question: What is the cap table? Why do I need to know this number? Can you explain this with some examples?<p>Q6. Quote from article: &quot;New shares can be issued at any time to dilute your position. In fact, it&#x27;s common for dilution to occur during any round of fundraising.&quot; My question: How does additional funding dilute my position? If I bought 30000 ISO options at say $1 per option, and I can sell it one day for say $2 per option, I am still making money. Why does it matter if additional funding occurred between buying and selling?<p>Q7. Quote from article: &quot;If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won&#x27;t net you as much as you&#x27;d intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved.&quot; Can someone show some approximate calculation for this? This is what I see: 1% of $250M is $2.5M. Say I lose 30% in tax I am still left with 0.70 * $2.5M = $1.75M. Can one really earn $1.75M from RSUs? The RSUs I have got at large public companies are of the order of $10K to $50K only.<p>Q8: Quote from the article: &quot;Tender Offers&quot;. Can someone elaborate this? Can a startup force me to return my options in exchange for tender offers? Or is it a choice I have to make, i.e. to keep the options or go with the tender offer?<p>Q9: Quote from the article: &quot;How many outstanding shares are there? (This will allow you to calculate your ownership in the company.)&quot; How? Can you provide an example to calculate my ownership? Can you also provide an example of what that ownership means for me, if the company is sold for say $200M? Can you also provide another example of what that ownership means for me, if the company goes public and the price of each stock option is $10 after it goes public?<p>Q10: Quote from article: &quot;Have there been any secondary sales for shares by employees or founders? (Try it route out whether founders are taking money off the table when they raise money, and whether there has been a tender offer for employees.)&quot; What does this mean? How does it affect me?