Tech Talk: Groupon and Options.

As you know, we love infographics.

Here’s another one. H/t Business Insider.

Curious about why Goldman Sachs CEO Lloyd Blankfein is flying to Chicago to woo Groupon and win its IPO? This chart should help.

Needham & Company analysts Mark May and Kevin Allen projected the revenues for the local daily deal market for the next five years. As you can see, they’re very bullish.

Even these bullish projections are probably coming up short. We’ve heard late last year Groupon was on a $2 billion annual revenue run rate, and Needham thinks it’s only 60-65% of the market.

(What’s funny about this chart is that it looks exactly like a joke chart Andrew Mason drew on a napkin when Groupon, then called “The Point”, picked up a round of funding.)

Now for the options. We ran into a friend this weekend who works at a very hot startup. He’s basically the $4bn man. We started talking about how he would play his cards with respect to options. It’s actually a lot more complex than it used to be with private/secondary market liquidity and valuations now in the picture. He sent a link to this article. Pretty cool. It’s a rundown on option acceleration by a partner at Union Square Venturer Partners (NY). Excerpt below, click this link for the full story. In case you were wondering, The Scrambler offers a generous all-in compensation package to early stage employees.

This MBA Mondays M&A case study is about the effect that stock option acceleration provisions have on M&A transactions. I am reblogging a blog post that Feedburner founder/CEO Dick Costolo (now Twitter CEO) wrote in the wake of the acquisition of Feedburner by Google. This post is still live on the web at its original location. While the names are fictional, the situations are not. It’s a really good read and addresses a whole host of issues that you will face as you think about stock option acceleration for your team.

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Question number 1 comes from an invisible Irish gentleman named Bernie in Wichita. Bernie writes, “Can you explain options acceleration? And when would I want to use it? And when wouldn’t I? And what’s single trigger vs. double trigger acceleration and how do you feel about those kinds of things?”

Those are great questions Bernie! Hopefully, I can at least get you to realize there’s a lot to think about here. Let’s dive right in.

Most options plans for your employees have a vesting schedule the defines how the options vest (ie, when the employee can exercise them). Vesting schedules for tech startups all generally look like a four year vesting period, with 25% of the total options grant vesting on a one year cliff (ie, nothing vests for a year and then 25% of the options vest on the 1 year anniversary), and then the rest of the options vest at 1/48th of the total options every month for the next 36 months.

Now let’s say you’ve got this classic vesting schedule and you hire somebody named Bobby Joe after you’ve been in business for one month, and he gets an options grant equal to 1% of the total outstanding shares. He works hard at your company for 11 months, after which your company is acquired for an ungodly sum of money. The acquirer decides that they were buying your company because of it’s cool logo and they don’t need any actual employees so they are all terminated effective immediately.

Bobby Joe’s options are worth how much? If you answered “Bubkas”, “Zero”, “nothing” or laughed at the question, you are correct. Although Bobby Joe has worked at the company for almost the entire life of the company, he gets nothing and the person that started 30 days before him gets 25% of their total options value. Doesn’t seem fair. Or as Bobby Joe would undoubtedly say “I’m upset, and I will exact my revenge on you at some later date in a compelling and thorough fashion”

Enter acceleration. Acceleration in an options plan can cause vesting to accelerate based on some event, such as an acquisition. For example, you might have a clause in your plan that states that 25% of all unvested options accelerate in the event the company is acquired.

…..(use the link above to get to the crux of the story)