Risk in startup stock options for employees

Risk in startup stock options for employees is shown in this case if the high valuations on paper vanish:

CNBC reports "A $250 million acquisition probably sounds like a lot to many employees of privately held companies. But for startups backed by big venture capitalist money, even a deal that big can be a financial bloodbath for employees. Case in point: Re/code spoke to a half dozen former employees of flash sale site Gilt Groupe in the two weeks since its $250 million acquisition by Hudson's Bay Company was announced. And at least three of them lost more than $10,000 as a result of the deal. The outcome is a stark reminder that buying shares in a startup you work for is often a riskier financial bet than it may seem, even at a company as hot as Gilt once was. The story of Gilt, which was once valued by investors at more than $1 billion, also serves as a cautionary tale for the 100-plus startups with valuations of $1 billion or more today: That number on paper can vanish in, essentially, a flash. Gilt spokeswoman Jennifer Miller, who is leaving the company in March, declined to comment. By early last year, when Gilt raised a last-ditch $46 million investment, Gilt employees Re/code spoke to assumed the company's eventual outcome would be financially disappointing, but not as bad as it actually turned out. Hudson's Bay is paying $2.17 for each common share of Gilt, according to documents Gilt provided to shareholders. About $1.71 is going to be paid up front, while the remainder is paid out over time because it is held in an escrow account in case of unforeseen liabilities on the part of the seller....

...Since its founding in 2007, Gilt has regularly awarded employees stock options when they are hired and sometimes when they are promoted. Stock options give the holders the right to purchase stock in the company in the future at a pre-determined price per share — called a strike price. I spoke to employees who joined in 2009 and 2010, some only a little more than a year after Gilt was founded and when it still had fewer than 100 employees. While employees who joined prior to 2009 received a strike price that turned out to be below the $2.17-per-share sale price, all Gilt employees who joined in 2009 or later received a strike price that turned out to be more than the sale price. For example, people who started working at Gilt in the first half of 2009 received options with a strike price of $2.24, according to documents. That strike price later rose to at least as high as $25 a share at the height of Gilt's growth and popularity."

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