Worked example
What a down round does to an early employee’s options
You join a startup at month six with 150,000 options. By its Series B, they're worth $1.4M on paper. Then the company raises a down round, and the same options would pay $4,011 if it sold at its new valuation. Here's how, step by step.
The company
This is the example company Paper Money loads, played as an early employee. The founders hold 9,000,000 shares beside a 1,000,000-share option pool. Your grant is 150,000 options at a strike of $0.11, the 409A price when you join, vesting over four years with a one-year cliff.
- Month 3: a $1.5M post-money SAFE at a $12M cap.
- Month 6: you join with 150,000 options.
- Month 6: 250,000 options to the rest of the team.
- Month 18: a $1M convertible note: 6% interest, 20% discount, $18M cap.
- Month 24: Series A, $8M at $30M pre-money; 1x, non-participating, pari passu, broad-based anti-dilution.
- Month 24: 700,000 options to the rest of the team.
- Month 36: Series B, $30M at $170M pre-money; 1x, participating, senior, full ratchet.
- Month 50: Series C, $20M at $45M pre-money; 1x, non-participating, senior, broad-based anti-dilution, options repriced.
Your options, event by event
| Event | Valuation | You own | On paper | If sold |
|---|---|---|---|---|
| M3 SAFE | $12M | 0.00% | $0 | $0 |
| M6 Option grant | $12M | 1.31% | $158K | $151K |
| M18 Convertible note | $12M | 1.24% | $149K | $133K |
| M24 Series A | $38M | 0.83% | $316K | $349K |
| M36 Series B | $200M | 0.70% | $1.4M | $1.3M |
| M50 Series C (down round) | $65M | 0.34% | $220K | $4,011 |
At the Series A, “if sold” even runs ahead of “on paper”: the unallocated pool counts in ownership but gets nothing in a sale, so everyone else's slice of the proceeds grows. Before it, the SAFE and note holders' claims keep a sale below the headline. The Series B is the high point, $1.4M on paper.
The Series C prices shares at $2.00, below the Series B's $9.36. The Series B negotiated a full ratchet, so its conversion price drops all the way to $2.00: each of its shares now converts into about 4.7 common shares, and those extra shares come out of common. Your ownership falls from 0.70% to 0.34%. And because the Series B is also participating and senior, a sale at the new $65M valuation pays its preference first and then shares in the rest; your options would get $4,011.
What a sale or an IPO would pay you
Paper Money sells a year after the last event, at month 62, when your grant has fully vested. The last column replays the same company with a plain Series B (1x, non-participating, pari passu, broad-based) to isolate what its terms cost you.
| Price | Acquisition | IPO | Acquisition, plain Series B |
|---|---|---|---|
| $50M | $0 | $169K | $0 |
| $100M | $207K | $351K | $378K |
| $150M | $413K | $534K | $660K |
| $300M | $951K | $1.1M | $1.4M |
| $1B | $3.5M | $3.6M | $4.8M |
At $50M, a sale pays common nothing: fees and the preferences ahead of you take it all. An IPO at the same value pays $169K, because every preferred share converts to common and preferences disappear. At Paper Money's default $150M sale, you'd take home $413K; with a plain Series B you'd have owned 0.45% instead of 0.34% and taken $660K.
The trade-offs
- The headline number is the wrong one. Ownership times the latest valuation prices your common as if it had preferred's rights. The gap between “on paper” and “if sold” is the cost of those rights.
- Investor terms matter more after a down round. A full ratchet and participation look like fine print at a $200M valuation. They decide your payout once the price falls.
- An IPO beats a sale at the same price for common, here at every price in the table, though Paper Money ignores lockups and what the stock does after listing.
- Before tax. Exercising and selling options is taxed, and how depends on the kind of option. ISO vs. NSO vs. RSU works that out.