That's when I learned to lean more towards the "options are worthless unless you're a very early employee in a high-potential startup".
(when I think about this, it saddens me a bit how cynical my first jobs have made me)
I don't regret it, because the money I'd've spent to exercise helped get me through year #1 at Matasano, but if it hadn't, I might be upset.
former employees can be written right out of the deal
Can you elaborate on this? How does this work? As a holder of a lot of common stock in an increasingly VC-dominated company, this is interesting to me - surely if I buy my shares, I have that proportion of the company with the same rights as any other common stock holder? What about a "normal" acquisition deal could change that?
You can bet that the founders and VC's (or other institutional investors) own a super-majority of the shares. Therefore, they can simply write the rules to give themselves whatever they want. For even more fun, sub-groups of VC's can team up to force out founders or other VC's.
One way this is typically done is to increase the share count by 10X, then sell these new shares for 10 cents on the dollar to a sub-group of new investors.
As an existing shareholder, you MAY have the right to buy into such a deal, but only if you are a "qualified investor", meaning that you have substantial liquid wealth. Otherwise, you'll be left sitting on the sidelines.
Even in a "normal" acquisition, the current shareholders will have to vote on the deal, so it's not uncommon for the large shareholders to cut lucrative side deals with the buyer that give them much more profit than the average shareholder.
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/08/06/...
The later investors just barely made their money back, so the employee options were (probably) worthless as well. Google issued new retention to make up for the fact that the employees got squashed, but not every acquirer is so generous.
My impression is that options agreements and grants that offer any real protection against being screwed once the company lacks any incentive to keep you happy are few and far between. If you don't _know_ you're protected from such things, you're undoubtedly not.
* Exits north of $100MM are rare, and a $400MM exit is rare indeed; virtually any such exit will be from a famous company. Valuations are at least somehow tethered to sales, and companies that justify mid- 9-figure exits can usually consider IPO... as an example of how rare that event is.
* In most sectors of the industry there are rule-of-thumb valuations based on multiples on sales. An enterprise software company aiming for a $150MM acquisition is expecting 4-8x, and needs to be achieving 18MM (optimistically) to 40MM (conservatively) sales to do that. You can reconcile this estimate by asking for current sales, this year's "number" (in a well-run company, everyone knows the number), and then asking "what's going to happen to scale the number up".
* Last time I had to think pragmatically about VC, a round that took participating preferred shares (in which the VC takes their money off the table, then takes their percentage off the table) was an indication of a weak round; if they're shooting for the moon, you're entitled to hold that against them.
* Finally, remember that if you quit, the equation changes again. When you leave, you can execute your vested options, but that costs money. Perhaps nobody in the company is less protected than former employees: investors have contractual provisions to protect their money, and employees are given retention grants, but former employees can be written right out of the deal. I've seen it happen.