I am an employee at a privately-controlled start-up. The company has a bright future, but I have been thinking of leaving to pursue other opportunities. I was an early hire, and have been granted options which, after a few rounds of investment and dilution, amount to a few percentage points of the company. The majority of my options have vested, and I could exercise them for an amount in the low five figures.
The company is aiming for an acquisition of at least $100M (and will possibly get much more), and I am optimistic about its chances of achieving that goal in a few years. Thus I feel that my options are potentially very valuable.
Questions:
1) Is it sensible to exercise my options now in this scenario?
2) It is possible that the company will take another round of investment prior to any acquisition. Should I fear that when I'm not around anymore, and the company has no incentive to treat me well, that my ownership will be substantially diluted? Can my future dilution be estimated or protected against?
3) Are there other ways to proceed? For example, should I attempt to get bought out now, somehow?
4) What other questions should I be asking?
If I decide to go down this road, I will seek professional advice, but I thought I would begin by consulting the smart people here on Hacker News.
Story one: a friend of mine worked at a startup that lasted ~5 years. He left in year four and exercised his (substantial) options. The company was, as I understood it, pro-forma cash flow positive, in a bright industry. And indeed, just over a year later, they were acquired for many tens of millions of dollars.
Unfortunately, they weren't acquired for enough money to sufficiently offset VC liquidation preferences. To mitigate this problem, the company and its acquirer created an incentive pool to create a fairly decent "earnout-style" return for existing employees. Former employees holding common stock? Zilch.
Story two occurs right around the time I heard story one. A guy joins a startup, sticks around for just shy of four years, leaves with a nice chunk of unexercised options to start another company. "Buy private company common stock and wind up like person one? Never!" Besides, person two needed the money for the new company.
Fast forward five years, and company two is acquired at a... non-negligible... price per share. Person two is out a fairly big chunk of cash. Person two's old boss makes douchey comment on IM! Person two is sad.
Well, for a few seconds; then he's happy his friends did well. He also rationalizes:
* The investment at the time was anything but risk-free, even if the company was acquired.
* It's not like the money didn't get invested; it just got invested in a company that hasn't 10x'd the investment yet.
* The money that would have gone into exercising the options would have been locked up for five years.
Before I bought private company common stock, I'd want to know everything about:
* The number of outstanding shares and as much as possible about the terms the current investors have. What preferences do the VC's have? "We're shooting for 100MM" might be code for "We make fuck all unless we hit 100MM" --- and note that not many companies can pay 100MM for other companies.
* The likelihood of future investment rounds in the company, which will have deliterious effects on the value of your shares.
* How stable and reliable the management team is. Is the current CEO new? Is the company making its numbers?
If it's not "real money", and iff you can't put the same money to good use in your new venture, I'd go ahead and exercise.