Let’s say you’re employee No. 20 at a Valley startup. By usual Valley standards, if you’re a fabulous developer, you’ll probably get a four-year option package worth about 0.2 percent of the company. Two years after you join, the company sells for $30 million. Wow, that sounds like a lot of money! You’re rich! Right?
Not so fast. If the company has taken $10 million of financing (at a 1x preference) that leaves $20 million to be split among the shareholders. You’ve vested half your 0.2 percent, so you get 0.1 percent, or $20,000 before taxes. Since exits are taxed federally as income (~25 percent) and you live in California (~9 percent state tax), you get to keep $13,200. That’s $550 for each of the 24 months you just worked your ass off. Oh, and in many deals, most of this money is not doled out right away to employees. It’s only offered after one to three years of successful employment at the acquiring company, to keep you around. Oy.