Overview Software engineers at NYC startups often receive stock options as part of their compensation. These options offer upside if the company exits via IPO, acquisition, or secondary sale.

1. Stock Options Basics

• Options give the right to buy company stock at a fixed price (strike price).
• Vest over 4 years with 1-year cliff.
• Options are worthless unless a liquidity event occurs.
• Two types: ISOs (possible tax benefits) and NSOs (taxed as income).
• Option grants are often given as a number of shares, but employees should calculate what % of the company that number represents.
• Without knowing the total shares outstanding, stock count is misleading.

2. Liquidity Events

a. IPO (Initial Public Offering)

• Company lists shares on a public exchange.
• Lockup period (typically 6 months) before employees can sell.
• Tax: Same-day exercise and sale = ordinary income. Early exercise + hold = potential long-term capital gains.

b. Acquisition (M&A)

• Company is purchased by another.
• Vested options may convert to cash or buyer stock.
• Unvested options may cancel or roll into buyer plan.
• Liquidation preferences affect payouts to common shareholders.

c. Secondary Sale

• Private sale of vested shares.
• Requires company approval.
• Common at late stages (Series C or later).
• Provides early liquidity pre-IPO.

3. Dilution

• As companies raise money, new shares are issued.
• Each funding round reduces ownership % of existing shareholders.
• Typical dilution per round: Seed (~20%), Series A (~20%), Series B (~15%), Series C (~10%), Series D (~10%).
• Example: 1.0% at Seed may become ~0.5% by IPO.
• Always convert your stock count to % ownership to understand dilution impact.

4. Example Outcomes (Hypothetical $1B Exit)

5. Key Factors

• Earlier = more equity, more risk.
• Later = less equity, more certainty.
• Dilution reduces equity %. Track round sizes.
• Liquidation preferences: investors get paid first.
• Vesting: stay longer to earn more shares.
• Taxes: plan for AMT, capital gains, and timing.
• Stock count alone is not meaningful—convert to % of total shares.

6. Best Practices

• Ask for total shares outstanding and strike price.
• Calculate % ownership, not just # of options.
• Know company stage and funding history.
• Understand liquidation stack.
• Plan tax strategy.
• Consider secondary sales if available.
• Diversify post-liquidity (don’t hold all company stock).

7. NYC Example Exits

• Datadog IPO (2019) ~$10B
• MongoDB IPO (2017) ~$1.2B
• Flatiron Health acquired by Roche (2018) ~$1.9B
• Tumblr acquired by Yahoo (2013) ~$1.1B
• Etsy IPO (2015) ~$3.5B

Conclusion

Startup equity offers potential for high upside. Understanding dilution, funding stages, stock count vs. ownership %, and timing of liquidity events is critical to realizing value from stock options.