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Displaying Tag 'what makes a good opportunity'

Enter to Learn

Suster on “Earn or Learn”

Posted by Al Doan under Online Media Reviews, Reactions to Mentors

23

May
Hard Knock MBA (Personal MBA)

Just read this post called “Earn or Learn” by Mark Suster that I’d had open in my reading browser for a while.  I found it worth sharing for one reason; it removes the ambiguity around startup earnings.  He addresses the situation that young people often stumble into – “I’m going to work at company X and they’re giving me stock!”  Suster dives right in -

Yet I often hear people asking about these types of opportunities express their questions to me whether I think this company is going to be a big hit.  It’s clear to me that many people confuse learn with earn.  I will do a simple calculation for them that goes like this.  OK, you would own 0.25% of the stock.  They raised $5 million in their B round.  Let’s assume that the company raised it at a normal VC valuation, which means it gave up 33% of the company and thus $5 million / 33% = $15 million post-money valuation.  If you never raise another round of venture capital (a big if) and if your company is sold for the normal venture exit ($50 million on average for 200 or so annually that get sold) then what is your stake?  $125,000.  Yup.  Simple math would have solved that but people rarely do the calculations or think about it.

And let’s say that it took 4 years to exit – that’s $31,250 / year.  Now … these are stock options and not restricted stock so you’ll likely be taxed at a short-term capital gains rate (see comments section for why).  In California that averages around 42.5% so in my state after tax you’d make an extra $18,000 / year and that’s in a positive scenario!  BTW, this ignores liquidation preferences which actually mean you’ll earn less.

I had a friend get a job offer with a startup recently that had received some funding , they explained that they paid a slightly lower salary but that he got stock options with the company, his question to me was how do I know if it’s a good idea?  I thought about for a minute, and I didn’t exactly know how to decipher the startup charade into an actual number either.  We ended up just asking the CEO directly, but knew there had to be a simpler breakdown of what was actually going on in such a situation.  Mark does a great job of doing just that.  Give it a read, and don’t be intimidated by the intentionally confusing chaos.

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Hard Knock MBA (Personal MBA)
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