{"items": [{"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770002277142", "anchor": "fb-770002277142", "service": "fb", "text": "Hahaha well... That said, you've got enough of a following that I'll actually see a traffic spike from jefftk.com over the next few days.", "timestamp": "1454724609"}, {"author": "Todd", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770002571552", "anchor": "fb-770002571552", "service": "fb", "text": "It's really hard for people to be sufficiently pessimistic when it comes to this sort of thing, right? So perhaps the takeaway is that taking a risk-neutral approach is incorrect, not because of the math or economics, but because of cognitive bias. A risk-averse approach would have helped protect you from the lack of information that affected your decision.", "timestamp": "1454724849"}, {"author": "Andrew", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770006393892", "anchor": "fb-770006393892", "service": "fb", "text": "Thanks for sharing! I've been reading about stock options recently. One post I read suggested that given the vast amount of uncertainty involved, a pretty good heuristic is to value options at $0.00.", "timestamp": "1454726684"}, {"author": "Alex", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770006393892&reply_comment_id=770037431692", "anchor": "fb-770006393892_770037431692", "service": "fb", "text": "→ In other words, \"A bird in the hand is worth two in the bush\". Or, rather, an infinite number in the bush.", "timestamp": "1454762863"}, {"author": "Frederic", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009073522", "anchor": "fb-770009073522", "service": "fb", "text": "It sounds like you didn't take active malice into consideration. That stock buyback seems intended to punish you and others in your spot.", "timestamp": "1454729122"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009073522&reply_comment_id=770031713152", "anchor": "fb-770009073522_770031713152", "service": "fb", "text": "→ I don't know enough about why they did this to say whether there was malice. My guess is not malice but indifference? I think they had lots of small shareholders from ten years of attrition and saw some advantage to the company of having dramatically fewer? But I really don't know.
They're nice people, and actively trying to hurt people doesn't seem like them?", "timestamp": "1454757163"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009073522&reply_comment_id=770040695152", "anchor": "fb-770009073522_770040695152", "service": "fb", "text": "→ Honestly, as one who was present for the thing, I think the small shareholders--some of whom were still in portfolio companies--were collateral damage. The split was to get some early, now departed, LARGE shareholders off the books. My understanding, which may be wrong, is that their stock was structured differently and may have had a direct profit-sharing component. These are people who would have come in at or near day one and received large stock grants in lieu of salary. I'm guessing it worked out okay for them, as I've met at least one person in this situation who hasn't worked since leaving.", "timestamp": "1454765065"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009073522&reply_comment_id=770040919702", "anchor": "fb-770009073522_770040919702", "service": "fb", "text": "→ So, maybe a bit of active malice, but not towards Jeff?", "timestamp": "1454765125"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "this user has requested that their comments not be shown here", "timestamp": "1454729734"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "this user has requested that their comments not be shown here", "timestamp": "1454729850"}, {"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009627412&reply_comment_id=770021144332", "anchor": "fb-770009627412_770021144332", "service": "fb", "text": "→ Upside potential, and therefore at least theoretically risk-neutral EV, is much higher for an early-stage company.", "timestamp": "1454740399"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009627412&reply_comment_id=770048479552", "anchor": "fb-770009627412_770048479552", "service": "fb", "text": "→ Elliot: presumably it's the expectation that these options are a better deal. While that didn't work out for Jeff and there are reasons to be skeptical in general, I think there are also reasons it's plausible that a company is willing to compensate you more highly in the form of options than cash.
One might be that taking compensation as options signals commitment and optimism.
They also might just be more willing to part with stock than cash, even if the options are valuable.", "timestamp": "1454771691"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009627412&reply_comment_id=770050400702", "anchor": "fb-770009627412_770050400702", "service": "fb", "text": "→ Stock options improve incentive alignment between employee and firm, which creates additional value that can be shared.", "timestamp": "1454772922"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1454785729"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009627412&reply_comment_id=770075969462", "anchor": "fb-770009627412_770075969462", "service": "fb", "text": "→ Elliot Right, the effect is weak, but with a 100% cash portfolio the effect is totally non-existant! It might be most of the benefits come from making employees feel (irrationally?) aligned with the success of the company, and thereby producing a good culture.", "timestamp": "1454785853"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1454785863"}, {"author": "Avi", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770009642382", "anchor": "fb-770009642382", "service": "fb", "text": "Thanks for sharing. I found this interesting. I personally estimate a value of $0 to any stock options I'm granted, and I hope one day I'll be pleasantly surprised to discover that my valuation was wrong.", "timestamp": "1454729869"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770011743172", "anchor": "fb-770011743172", "service": "fb", "text": "In general you should value the options at zero unless you have a substantial fraction of the company (at least several percent). Being a minority shareholder of a privately held company makes it very easy for you to lose out.
If you had been given options you weren't forced to exercise upon departure (which you could have negotiated for) would the reverse split still have hurt you as much? If you just hadn't exercised?", "timestamp": "1454731466"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770011743172&reply_comment_id=770031743092", "anchor": "fb-770011743172_770031743092", "service": "fb", "text": "→ I'm not sure how the reverse split worked for people still at the company. Dan?", "timestamp": "1454757247"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770011743172&reply_comment_id=770041159222", "anchor": "fb-770011743172_770041159222", "service": "fb", "text": "→ We came out better, honestly. Our existing options were canceled, then reissued at the same percentage with a lower strike price and no expiration upon leaving the company, with the only caveat being we aren't able to exercise until immediately preceding the sale of the company.", "timestamp": "1454765383"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770011743172&reply_comment_id=770041438662", "anchor": "fb-770011743172_770041438662", "service": "fb", "text": "→ The other thing the company does, then as now, is use the options as proxy for ownership in the corporate portfolio, so that when a sale of one of the incubated companies occurs, we get cash bonuses, which can be substantial.", "timestamp": "1454765633"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770011743172&reply_comment_id=770042202132", "anchor": "fb-770011743172_770042202132", "service": "fb", "text": "→ @Dan: \"The other thing the company does, then as now, is use the options as proxy for ownership in the corporate portfolio, so that when a sale of one of the incubated companies occurs, we get cash bonuses, which can be substantial.\"
But only for current employees, right?
(Which is very reasonable for the company, but something to consider as an employee if you may not stay until sale.)", "timestamp": "1454766380"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770011743172&reply_comment_id=770042576382", "anchor": "fb-770011743172_770042576382", "service": "fb", "text": "→ Well, right, if you leave you give up the bonuses, but you're not forced to exercise, so at whatever point they sell the incubator itself there could be some theoretical upside. Not something you want to plan to retire on, obviously.", "timestamp": "1454766658"}, {"author": "Gregory", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770017476682", "anchor": "fb-770017476682", "service": "fb", "text": "> Worse, their current valuation (~1.2M) was lower than it was when my shares were issued (~4.7M)
This bit is puzzling to me. Do you understand what went into this? Was the company really worth that little (hard to imagine unless it had simply failed, if it really had so many people); or was this number some kind of manipulated valuation aimed at cheating small shareholders like you in this reverse split; or was there just a ton of dilution, and the company's valuation was much greater than that but the value of your shares had gone down?", "timestamp": "1454736393"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770017476682&reply_comment_id=770040470602", "anchor": "fb-770017476682_770040470602", "service": "fb", "text": "→ It's puzzling to me as well. I don't know more than I wrote, though I could ask them.", "timestamp": "1454764816"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770017476682&reply_comment_id=770041902732", "anchor": "fb-770017476682_770041902732", "service": "fb", "text": "→ Pretty sure this was \"capital rearranging reality to their liking.\"", "timestamp": "1454766100"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770017476682&reply_comment_id=770042002532", "anchor": "fb-770017476682_770042002532", "service": "fb", "text": "→ (To borrow from Richard, above.)", "timestamp": "1454766155"}, {"author": "Kent", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770021523572", "anchor": "fb-770021523572", "service": "fb", "text": "Exercising options that are in the money, and holding them for a single day longer than absolutely required, is a catastrophically bad idea. Back in the original .com boom there were people that did just that and by the time they rode the stock back down to next to nothing they held stock that was virtually worthless, but owed a tax bill on the value at the time of exercise. There were people that owed hundreds of thousands or more in taxes, on paper that was essentially worthless.", "timestamp": "1454741317"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770021523572&reply_comment_id=770031588402", "anchor": "fb-770021523572_770031588402", "service": "fb", "text": "→ When I exercised my options they weren't worth very much, so no large tax bill. The forced early exercise of leaving the company early is very similar to the early exercise strategy people use to avoid the situation you're warning about.", "timestamp": "1454756914"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770031513552", "anchor": "fb-770031513552", "service": "fb", "text": "@Andrew, Elliot, Avi: I do think valuing options at $0 is a good approach generally, but risk aversion is a big part of that. When doing financial planning for yourself, if something has a 75% chance of being worthless, valuing it at $0 or very close is about right. But if you're actually risk neutral with this money I'm not so sure.", "timestamp": "1454756694"}, {"author": "Avi", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770044008512", "anchor": "fb-770044008512", "service": "fb", "text": "Jeff, It's my understanding that you estimated $2k expected return ($9k - $7k) years into the future, right? But if you're truly risk neutral, shouldn't you be comparing that against extremely risky alternatives like a highly leveraged diversified stock market investment? Or high loadings on equity investment factors like small, value, and momentum? It's conceivable that one could reasonably estimate higher expected return in these investments. If I was being purely risk neutral then I'd be inclined to take these latter investment risks where at least I have a large amount of historical data and academic research that provides reason to expect that these risks will be rewarded. There are also less problems of asymmetric information and market manipulation.", "timestamp": "1454768247"}, {"author": "Avi", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770044008512&reply_comment_id=770045320882", "anchor": "fb-770044008512_770045320882", "service": "fb", "text": "→ Then of course there's also the expected value of giving $7k now vs giving $9k later. In most cases I'd expect giving now to have a higher expected value and this may be high enough to make up for the $2k difference.", "timestamp": "1454769444"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770044008512&reply_comment_id=770069971482", "anchor": "fb-770044008512_770069971482", "service": "fb", "text": "→ Yes, all of these would have been good things to think about at the time!", "timestamp": "1454781563"}, {"author": "Elizabeth", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770048459592", "anchor": "fb-770048459592", "service": "fb", "text": "I have a kind of similar choice I have to make this weekend, could we vchat for half an hour?", "timestamp": "1454771673"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770048459592&reply_comment_id=770070315792", "anchor": "fb-770048459592_770070315792", "service": "fb", "text": "→ Sure, sometime Sunday?", "timestamp": "1454781635"}, {"author": "Elizabeth", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770048459592&reply_comment_id=770077371652", "anchor": "fb-770048459592_770077371652", "service": "fb", "text": "→ sure. late morning my time/early afternoon yours? I don't have your email address but I know Julia has mine", "timestamp": "1454786595"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770048459592&reply_comment_id=770077471452", "anchor": "fb-770048459592_770077471452", "service": "fb", "text": "→ jeff.t.kaufman@gmail.com
That timing works for me!", "timestamp": "1454786709"}, {"author": "Alexander", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770074846712", "anchor": "fb-770074846712", "service": "fb", "text": "You mention it at the end of your post, but from a finance-y perspective the information asymmetry in this deal is what makes this really terrifying from any non-senior employee's point of view (which is my understanding of your position at the time). There's a reason people with inside information aren't allowed to trade on public stock exchanges.
I actually think a lot of the other points can be covered under 'lack of information', the fact that you didn't give much attention to some of the ways you could lose money, missing the employees/ex-employees difference, the lack of time discounting, anchoring on their numbers rather than having your own. This would be fine if whoever you are negotiating with is similarly information-poor, but that's clearly unlikely to be the the case here.
On the plus side, less than ten thousand dollars is not a huge price to pay to learn this lesson, especially if you pass this lesson on to other people. Plenty of people make similar mistakes that cost them significant proportions of their retirement savings.", "timestamp": "1454784963"}, {"author": "Julia", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770078319752", "anchor": "fb-770078319752", "service": "fb", "text": "Benjamin Roman Duda Robert Wiblin", "timestamp": "1454787423"}, {"author": "Hugh", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770129706772", "anchor": "fb-770129706772", "service": "fb", "text": "Thanks for sharing.", "timestamp": "1454816973"}, {"author": "Benjamin", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770142685762", "anchor": "fb-770142685762", "service": "fb", "text": "Thanks for writing this up Jeff.", "timestamp": "1454828654"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812", "anchor": "fb-770319805812", "service": "fb", "text": "If they were a private company, how did they decide what price to buy your stock back at--was it through a 409a valuation or something similar?
If so, you got royally screwed by the reverse split trick--it's quite easy (and advantageous) for companies to get 409a valuations that are dramatically lower than what some people are willing to pay for the stock. I would bet this is especially true if your business model involves making a ton of revenue from selling spinoffs, since it's easy to convince accountants that having another big hit spinoff is unlikely.", "timestamp": "1454978786"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770320888642", "anchor": "fb-770319805812_770320888642", "service": "fb", "text": "→ [after looking at the website] Wait, they have 100 employees?! If they really got a valuation of $1.2m at anywhere near that size, I would seriously consider flagging that to the IRS as potentially fraudulent. This is a total slimeball move, unless there are dramatic extenuating circumstances for that valuation.", "timestamp": "1454979338"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770323328752", "anchor": "fb-770319805812_770323328752", "service": "fb", "text": "→ It's possible that there was dilution I'm not aware of, and so the valuation I'm calculating is low by that factor?", "timestamp": "1454980538"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770328538312", "anchor": "fb-770319805812_770328538312", "service": "fb", "text": "→ Unless they were diluted at least 10x (seems pretty unlikely), even the adjusted valuation would still be heinous.
I'd be really interested to see the details of how their valuation was arrived at (e.g. the 409a valuation report). I might be over-aggressive here, but if I were you, I'd be asking for all the documentation I could get my hands on. The whole situation stinks.", "timestamp": "1454983300"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770328737912", "anchor": "fb-770319805812_770328737912", "service": "fb", "text": "→ How many shares did you have? I'd be interested to know how big of a minority shareholder one would have to be in order not to get wiped out in the split. (Or even better, did they mention how many shares are currently outstanding?)", "timestamp": "1454983450"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770329820742", "anchor": "fb-770319805812_770329820742", "service": "fb", "text": "→ @Ben: My memory is that they split down to 12 shares.", "timestamp": "1454984102"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770329990402", "anchor": "fb-770319805812_770329990402", "service": "fb", "text": "→ Jeff Kaufman 12 shares in the entire company? So everyone with less than 8.3% equity was wiped out?? Is that a typo?!?!
If not--holy shit. Run, don't walk, to your nearest employment lawyer, along with every other minority shareholder in the entire company.", "timestamp": "1454984249"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770330234912", "anchor": "fb-770319805812_770330234912", "service": "fb", "text": "→ Not a typo.", "timestamp": "1454984462"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770330798782", "anchor": "fb-770319805812_770330798782", "service": "fb", "text": "→ This has \"illegal\" written on it in giant 100-foot-tall flaming letters.", "timestamp": "1454984897"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770330858662", "anchor": "fb-770319805812_770330858662", "service": "fb", "text": "→ I spent 6 minutes rewriting that sentence to figure out if there was a better way to convey how illegal that sounds. I couldn't come up with one. But like: really, REALLY REALLY illegal.", "timestamp": "1454984960"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770331392592", "anchor": "fb-770319805812_770331392592", "service": "fb", "text": "→ I'll talk to them; I probably misunderstood something.", "timestamp": "1454985414"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770331532312", "anchor": "fb-770319805812_770331532312", "service": "fb", "text": "→ Ok. Please let me know how it goes, I'm extremely curious as to whether there's a reasonable explanation.", "timestamp": "1454985479"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770372245722", "anchor": "fb-770319805812_770372245722", "service": "fb", "text": "→ Talked to them over email: there were 1.2M shares @ $1, and then they did a 90k:1 split. So yes, anyone with less than 7.5% was fully bought out.", "timestamp": "1455026456"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770372455302", "anchor": "fb-770319805812_770372455302", "service": "fb", "text": "→ And 1.2M shares matches what it was when I was hired, so no dilution. Valuation went from $4.5M ($4/share) when I was hired in 2010 to $1.2M ($1/share) summer 2015 when they split.", "timestamp": "1455026648"}, {"author": "Ross", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770373168872", "anchor": "fb-770319805812_770373168872", "service": "fb", "text": "→ On second look, +1 to Ben here. From a Bloomberg View blog post (http://www.bloombergview.com/.../interest-rates-and-stock...) discussing a 250:1 split: \"This is all above-board and out in the open: There was a proxy, explaining that the company is doing this to go private, and a fairness opinion, and a shareholder vote, though of course there is also an activist investor objecting to the transaction.\" If that's not what happened...I'd agree that it's at least worth approaching counsel.", "timestamp": "1455027081"}, {"author": "Ross", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770373238732", "anchor": "fb-770319805812_770373238732", "service": "fb", "text": "→ Ben: From the post, a company might do this to get under 300 shareholders, so it stops being publicly-traded, which might be a thing you want even if you're not actively trying to screw anyone out of their money.
Of course, 12 <> 300, but...", "timestamp": "1455027186"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770376926342", "anchor": "fb-770319805812_770376926342", "service": "fb", "text": "→ - the problem probably isn't governance (I'm guessing the majority of shareholders would agree to this). The problem is that whatever they did to decide on cashing people out at a valuation of $1.2 million seems very likely to involve fraud.
- the company is already private. The point of this is clearly just to wipe their cap table.", "timestamp": "1455029821"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770377909372", "anchor": "fb-770319805812_770377909372", "service": "fb", "text": "→ Anyway, I'm 100% serious about this being probably illegal, and I also bet there are people who got much more screwed by this than Jeff, so let me know how things develop :)", "timestamp": "1455030978"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770381267642", "anchor": "fb-770319805812_770381267642", "service": "fb", "text": "→ Well, this happened in June (and I didn't deal with it then because I had papers that were inaccessible because of the mercury spill, and then because I didn't get to handling it) and I still haven't heard anything from any other shareholders. So I suspect there's not much to be learned by waiting.", "timestamp": "1455032697"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770383697772", "anchor": "fb-770319805812_770383697772", "service": "fb", "text": "→ Me: \"It sounds like the company's valuation went from ~$4.6M when I was hired in 2010 to $1.2M at the time of the split summer 2015. My impression was that the company grew a lot during that period, in terms of employees, revenue, and subsidiaries, though, which makes the lower valuation surprising. What am I missing?\"
Them: \"The company borrowed substantially.\"", "timestamp": "1455034908"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770385688782", "anchor": "fb-770319805812_770385688782", "service": "fb", "text": "→ Still stinks. If they borrowed enough to make that valuation legit, they must be a hair's breadth from insolvency. (Their payroll liabilities alone should be almost $1m/mo with 100 employees.) Can you get a copy of the report determining the valuation, or at least their financials (income statement/balance sheets)?
PS: let me know if you don't care enough to keep pestering them--I'm just really curious :D", "timestamp": "1455036488"}, {"author": "Benjamin", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770443203522", "anchor": "fb-770319805812_770443203522", "service": "fb", "text": "→ A typical valuation of a tech company might be an EV/Revenue multiple of 5-10.
EV = equity value + all debt
So if you can find out their revenue and debt, you can work out roughly what the equity would be worth.
If you've got 100 employees, you'd expect the revenue to be at least several 10s of millions per year.
So that would imply an EV of ~$100m.
So the debt would need to be $99m to justify such a low valuation.
And that would imply extreme leverage with a very high chance of the equity holders being wiped out, plus a high chance of bankruptcy.
So either the company is fucked or the valuation is wrong.", "timestamp": "1455073660"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770459705452", "anchor": "fb-770319805812_770459705452", "service": "fb", "text": "→ Benjamin are you talking about venture capital valuations? Legal appraisals of common stock can often come with lower multiples (e.g. 409a valuations are typically somewhere around 20% of your latest funding round sticker price, more like a 1-2x revenue multiple). Either way it's insane implied leverage though.", "timestamp": "1455081908"}, {"author": "Benjamin", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=770467439952", "anchor": "fb-770319805812_770467439952", "service": "fb", "text": "→ Ben Yep, just thinking about VC valuations. I don't know anything about 409as.", "timestamp": "1455086137"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=771543478562", "anchor": "fb-770319805812_771543478562", "service": "fb", "text": "→ They sent me the cover sheet for their independent valuation report, which had an even lower valuation than the $1.2M. They won't send me the whole report, but I can come in to view it, which I'm doing a week from tomorrow.", "timestamp": "1455671135"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=771547735032", "anchor": "fb-770319805812_771547735032", "service": "fb", "text": "→ Wow that's amazingly sketchy. I hope they let you take pictures of it or something, since the full reports can be a bit impenetrable (if Sendwave's is any example).", "timestamp": "1455672249"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=772622695802", "anchor": "fb-770319805812_772622695802", "service": "fb", "text": "→ @Ben: This afternoon I went by Cogo Labs to see a copy of the valuation report. Matt Plasker, the CFO, wasn't willing to send me the report, but he was willing to let me review it in person. I spent about an hour looking over it, and wasn't permitted to take notes (or pictures, presumably, but I didn't ask about that). So here's my view, from memory. Overall, it looks like Cogo Labs had such a low valuation because they had lost $2-3M/year for the past three years and built up $10-$15M in debt.
For figuring out the total value of Cogo, they looked at Cogo's management's projections for revenue and expenses, plotted things out through 2023. In 2014 Cogo's revenue was ~$16M, with an ~$8M cost of revenue (which I think is buying ads) and ~$10M in other sorts of expenses (which I'd expect to be mostly payroll and rent). They got a net present value of the future income stream of ~$1M. Then they added ~$1.5M cash on hand, ~$7M value of incubated companies, and another ~$3.5M of things I forget, like tax benefits, to get a $13M total value.
As I said, though, Cogo had been operating at a loss, building up debt. This debt was mostly from Link Ventures, which is a closely related organization. In 2014 that was either ~$10M or ~$15M; I was confused in how to read the chart.
To price the common shares, they did some sort of Black-Scholes thing to handle liquidity preference, with the debt counted as as most senior. This got them a $0.63 value per common share (what I had). Then they discounted that down by ~35% because the shares weren't marketable, and another ~2.5% (I think for not being voting shares), to get a $0.41 final share value. (Though they compensated me at $1.)
For figuring the ~$7M value of companies directly and indirectly held (Cognius, HubAnalytics, EverQuote, etc) they referenced 2014 valuation reports for those companies. Cogo holds some of EverQuote directly; with the others it holds them via holding 16% of Link Ventures (the organization that was lending it operating money).
One thing that surprised me looking through the financials was that there didn't seem to be anything for the 2011 sale of Autotegrity to ADP, which I had thought was for over $100M. The closest thing to this that I saw was ~$6M in other income for 2011. But even if Cogo only owned 16% of Autotegrity via Link Ventures instead of owning it outright as I had thought, you'd still expect to see $16M.", "timestamp": "1456355588"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=772635939262", "anchor": "fb-770319805812_772635939262", "service": "fb", "text": "→ Hmm. Candidates for plausibly sketchy things here, in order of likelihood:
- no income/assets from Autotegrity acquisition
- transactions with Link Ventures could be being used to hide cash flow (e.g. if the interest rate on the debt is very high, or if Cogo paid anything to Link Ventures)
- a lot of the valuation depends on valuation reports for other companies that could be sketchy
Hard to say whether any of these is actually sketchy without more info, but the circumstances (crazy stock split antics + preventing you from even taking notes on the report) are a HUGE red flag.", "timestamp": "1456363203"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770319805812&reply_comment_id=772722136522", "anchor": "fb-770319805812_772722136522", "service": "fb", "text": "→ I talked to them over the phone about the Autotegrity sale proceeds. I had thought Autotegrity sold for $100M, but it was less than that (didn't say how much). Additionally I had initially thought Cogo had owned 100% of Autotegrity, but Cogo only owned 40% of Autotegrity initially, and by the time I was hired in 2010 Cogo had distributed some (didn't say how much) of those shares to its shareholders as a stock dividend. So the ~$6M I saw for 2011 \"other income\" was Cogo's share of the Autotegrity sale.
(And then most of Cogo's share of that sale was distributed to current employees roughly in proportion to their stock holdings.)", "timestamp": "1456419609"}, {"author": "Benjamin", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770325339722", "anchor": "fb-770325339722", "service": "fb", "text": "Yeah usually a company would need to be heading straight for bankruptcy for a 100 person firm to be valued so low.", "timestamp": "1454981709"}, {"author": "Dan", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770384885392", "anchor": "fb-770384885392", "service": "fb", "text": "Aaaand cue the expected traffic spike. ;)", "timestamp": "1455035888"}, {"author": "Omer", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=770630323532", "anchor": "fb-770630323532", "service": "fb", "text": "Thanks for the lesson!", "timestamp": "1455206853"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052", "anchor": "fb-771005312052", "service": "fb", "text": "> Worse, their current valuation (~1.2M) was lower than it was when my shares were issued (~4.7M), which meant that after paying $2,820 to exercise I would be getting back just $734.
Doesn't that mean the exercise price was about the same as the original stock price when you exercised the options? Shouldn't the stock price be a lot higher than the strike price? Did the valuation go down after you were issued the options and before you exercised?", "timestamp": "1455325098"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771006494682", "anchor": "fb-771005312052_771006494682", "service": "fb", "text": "→ I exercised when leaving the company, at which point I paid the strike price. I'm not sure what the valuation was at that point.", "timestamp": "1455325739"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771007078512", "anchor": "fb-771005312052_771007078512", "service": "fb", "text": "→ I misread your comment\u2014you said the valuation was $4.7M when shares were issued. That means the stock price minus strike price was approximately $0, even before the drop in valuation? That seems wrong.", "timestamp": "1455326132"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771008036592", "anchor": "fb-771005312052_771008036592", "service": "fb", "text": "→ No, this is standard when issuing stock options and in fact is the whole point of options--if you issue options whose strike price is equal to the (IRS-determined) fair market value of the underlying, then the options do not incur taxes when they are granted, so you can give your employees exposure to positive price movements without hitting them with a giant tax bill (that they may not even be able to pay if the shares are illiquid).", "timestamp": "1455327065"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771008056552", "anchor": "fb-771005312052_771008056552", "service": "fb", "text": "→ (Note that often the IRS-determined fair market value of the common stock is substantially less than what venture capitalists are willing to pay for preferred stock, generally around 20%.)", "timestamp": "1455327117"}, {"author": "Buck", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771008091482", "anchor": "fb-771005312052_771008091482", "service": "fb", "text": "→ In some cases, the IRS-determined fair market value of common stock is far less than that; I've heard of it being 2000x less.", "timestamp": "1455327175"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771008166332", "anchor": "fb-771005312052_771008166332", "service": "fb", "text": "→ Yeah I think it's a lot more flexible at the very early stages. We were told to expect 20% of our last funding round.", "timestamp": "1455327221"}, {"author": "Buck", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771008221222", "anchor": "fb-771005312052_771008221222", "service": "fb", "text": "→ BTW, you can shop around for valuations: different places compete to offer you the lowest possible valuation they think they can give you.", "timestamp": "1455327290"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771005312052&reply_comment_id=771012103442", "anchor": "fb-771005312052_771012103442", "service": "fb", "text": "→ I'm not sure what the valuation was when I left, but since I wasn't there that long and they didn't raise money it's possible it hadn't changed since I started.", "timestamp": "1455329850"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771007367932", "anchor": "fb-771007367932", "service": "fb", "text": "For commenters who are saying they value equity at $0: when you're considering an offer, would you ask your potential employer for an additional, say, $100 salary in exchange for giving up all your equity?", "timestamp": "1455326346"}, {"author": "Frederic", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771007367932&reply_comment_id=771544641232", "anchor": "fb-771007367932_771544641232", "service": "fb", "text": "→ This is like that \"if you think you don't have a soul, will you sell yours to me for $5?\" question", "timestamp": "1455671432"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771007367932&reply_comment_id=771545190132", "anchor": "fb-771007367932_771545190132", "service": "fb", "text": "→ Frederic, is that a yes?", "timestamp": "1455671583"}, {"author": "Frederic", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771007367932&reply_comment_id=771550978532", "anchor": "fb-771007367932_771550978532", "service": "fb", "text": "→ I would like to see some data before I made a judgment. The value is certainly not $0 but if you're dealing with a sufficiently unlikely value of $large then $100 may be a better bet. This is also why you shouldn't play powerball.", "timestamp": "1455674591"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/770001628442?comment_id=771007367932&reply_comment_id=771570564282", "anchor": "fb-771007367932_771570564282", "service": "fb", "text": "→ I was assuming people meant $0 as approximate. Something like \"under $5k\".", "timestamp": "1455683338"}, {"author": "Levi", "source_link": "https://plus.google.com/109623028389118181618", "anchor": "gp-1479308085489", "service": "gp", "text": "Using your probabilities and spitballing 10-year expected aggregate salary as $1m, the Kelly capital growth criterion would say to pick the amount of salary that when given up would maximize the expected log of future wealth.\n
\n
\nSo if 0.014 million got you a .0006 interest in the company, then, for the first probability distribution (the one with a linear log of $498m), it becomes choose the x (total salary foregone) that maximizes:\n
\n
\n.1*log(1-x) + .05*log(1+160x/140) + .1*log(1+460x/140)+.15*log(1+1260x/140) + .25*log(1+2860x/140) + .2*log(1+4360x/140) + .15*log(1+5860x/140)\n
\n
\nFor that distribution, then, you maximize your expected capital growth with putting nearly 90% of your earnings into the options.\n
\n
\nOf course, for the EV=$175m valuation, that distribution changes the function to be maximized to:\n
\n
\n.5*log(1-x) + .05*log(1+160x/140) + .1*log(1+460x/140) + .25*log(1+1210x/140) + .1*log(1+5860x/140)\n
\n
\nThat function gets maximized at 42%.\n
\n
\nAnd for the last ($55m EV) distribution, Kelly would maximize\n
\n
\n.44*log(1-x) + .1*log(1+10x/140) + .25*log(1+160x/140) + .15*log(1+460x/140) + .05*log(1+1660x/140) + .01*log(1+5860x/140)\n
\n
\nWhich maximizes at around 30%.\n
\n
\nOf course, betting these amounts will be rather volatile (those risks are perhaps best described as the line between aggression and insanity), and it's important to guard against the probability distribution being inaccurate, so betting a fraction of those maximizing wagers (e.g. one quarter) would be a good idea. At quarter-kelly for the last valuation, that would suggest taking about 7.5% of your salary as options, which isn't that far off from what you ended up doing.", "timestamp": 1479308085}]}