We’ve heard that this latest round of
financing cut the company’s valuation
roughly in half. Foursquare declined
to speak to valuation, but its previous
round in 2013 put it at a reported
$650M valuation.
In other words, if you joined Foursquare in the last two years, your stock options are now worthless.
Not at all true. Employee option prices are not based on market (e.g. VC) valuation. They're based on 409A valuations which are usually much, much lower.
409(a) valuations of common stock are often 15 to 20% of the preferred. You can see why with Foursquare, where they may get bought out at a low value that doesn't return any capital to common at all.
If the preferred price had been $20, options might have been granted at $4. If this round is at $10, the $4 options are not "underwater".
It's my understanding that if a 409A valuation is not in line with market valuations (which pretty much means projections based on funding rounds for startups), the IRS will treat the difference more like an ISO. I've seen this first-hand, but I'm no tax law expert.
Most employees have a stock strike price that is say $2.00 when the company is valued at $20.00.
So if each Foursquare stock was worth $20 and is now worth $10, the strike price of $2 still allows employees to make $8 per share now.
If you are granted 100,000 shares and wait it out and build the company back up to $20 you will make $18 per share times 100,000 shares for a nice little $1.8M bonus for putting in the hard work.
Maybe because you stuck it out you not only increased the price to $50 per share, but you were also granted 100,00 more stock because you didn't care what TechCrunch said. $9.6M isn't bad for 4 years of hard work...
"So if each Foursquare stock was worth $20 and is now worth $10, the strike price of $2 still allows employees to make $8 per share now."
"Now" is wildly inaccurate; these are still illiquid assets, so even if this person were to exercise their options, they can't sell yet, most likely (I'd be shocked if they could turn much of a profit selling in the private markets).
And I have no idea what the terms of the new investment are, but I imagine they include some sort of protections for these new investors (I'd put money on them getting their money back plus full participation in a liquidity event). They probably get preferred shares. They probably get last-in/first-out privileges.
If you joined in the last two years, you're probably underwater based on strike price. Even if you're not, if the company has a liquidity event, once these latest investors get their money back, you're probably underwater by then (this new $45m coming off the top, minus any debt, you might split whatever's left -- MAYBE).
If you're an employee, you're probably not going to get anywhere close to $9.6m even if the stock rebounds. That's reserved for the new CEO who turns the company around, maybe some of his top brass.
Do employees have any opportunity to sell their ISOs on the secondary markets if they don't want to wait? No clue how any of that works so forgive me if that is a dumb question.
Tricky question that I'm not 100% sure on the answer of... My understanding is that it depends on the company, the stock agreement and of course finding a buyer. A company like foursquare is probably tough because there is such a risk of the stock being worthless. There are a lot of ways that I mentioned such that most common stock will become worthless, so all of that is factored in.
