The last $350 million round @ a $1.6 billion valuation priced common shares @ $5/share implying ~ 320 million common shares (napkin math ignoring a bunch of other variables). 100,000 options would represent .03125% of the company. Assuming the strike price was at least $500 million (maybe more), that's a gain of $781,250, or ~ 43x on his initial $18k investment. A great angel investment for sure, but perhaps not millions. If that's truly the same number of options that some of the earliest employees were granted (as mentioned in the article), then I feel bad for those employees as they probably deserved a bit more.

Why are you assuming the strike price is $500MM (not to mention this is the price of the company, not the strike of the option)? The strike price is what the stock is worth in terms of GAAP accounting, not what a VC is willing to buy X% of the company for (if I offer you $1 for x% of your company, is the company now necessarily worth $1/x?)

Companies of that size will typically have biannual 409(a) valuations done by professional valuation firms in order to establish the ''fair market value'' of common stock. This value becomes the strike price for employee options. Usually this is done for tax purposes, so that the IRS doesn't come in later and accuse you of under-pricing. In my experience common stock is valued around a 30-70% discount to the latest preferred stock (but can fluctuate on a case by case basis), with greater discounts seen in small companies (''we could go bankrupt at any time'') and lesser discounts seen in more mature companies (''we're going to IPO for billions we're just not sure if there will be a 2 or a 10 in front''). In the case of Jet, I'm just guessing at the fair market value at the time the award was made based on the published investment round valuations.

<< (if I offer you $1 for x% of your company, is the company now necessarily worth $1/x?) >>

Great point. Secondary market transactions have to be included in the 409(a) valuation analysis and this caused a lot of problems for companies like Facebook who had active secondary markets (with rising prices) even as they tried to keep option strike prices low to recruit new employees. I am not an expert but I think the short answer is that if you buy $1 worth of stock then it can be ignored as a non-material transaction but if you buy $1 million then it has to be scrutinized along with all similar transactions which would be collectively factored into the formula for ''fair market value''.

Another minor point - when calculating return in this case, you have to adjust for the fact that this guy ''invested'' $18k but wasn't able to count that money towards his basis in the stock or realize long-term capital gains treatment the way a typical angel investor would have. This means he will likely pay an extra 20% in Federal taxes, which lowers his LTCG-adjusted psuedo-angel-investment return a bit further.

I wonder what the specifics are. It says "stock options" in the linked article and "He'll be able to vest or exercise his stock options if Jet ever goes public or sells to another company."

I always hear stories about early stage employees getting the short end of the stick during acquisitions. Could there be a chance that this acquisition ends up not in his favor and he is out $18k?

It is possible.

There was a subsequent 350m round in November so that means dilution for everyone.

So that, coupled with liquidity preferences for the venture investors, could mean he didn't get much.

He likely does have cash as well as shares in Walmart from this deal, but I doubt he made "millions" from this, and it is entirely possible he is close to breakeven (just as possible that he has a six figure amount). But we don't have any transparency from this.

This is the kind of gambling the society puts you on a pedestal for, so don't worry too much about the bet. Its a "good" one.

Pretty cool. While this is almost certainly in violation of general solicitation SEC regulations, I doubt there would be any action taken by the regulator.

The surprising part is that Jet.com's legal department let this fly.

It was probably nonqual or ISO employee grant. Those get tied all the time to performance.

Why would this violate? They are giving a reward, no value implied or stated.

In general, the unregistered "general solicitation" for the purchase of securities is prohibited. You can't go on TV and ask people to buy your stock in exchange for money unless you have registered to do so--an IPO or subsequent S1.

Stock is certainly a security. Stock options are just call options of a security, and also a security. Obviously there is some (future, conditional) value implied since it's a reward.

It doesn't really matter whether you are trading stock for dollars, or work, or fb likes, or whatever--it's still a general solicitation because they are being traded for something.

Caveat: I'm not a lawyer but I have been involved in startups in the space for many years.

Well he was just referring people to sign up for the website. The money was money he spent advertising the website(?), so the money only went to getting new members. The stocks were given as the reward for the most sign ups, not in exchange for money.

The point is that the stock was exchanged for something (referrals, marketing, etc), and that the contest was announced (ie, general solicitation). That no cash traded hands doesn't matter.

There is precedent of an almost identical enforcement action by the SEC, but my google fu is failing me.

Can a startup publicly recruit with the promise of stock as compensation?

Would be Jet.com's issue, not the guy.

That is correct.

You can sell securities to non-accredited investors if you have audited financials (basically conforming to public IPO requirements) and the number of people you do so is greatly limited. This stuff is more complicated than I'm making it seem, but small quantities, again with audited financials (minimum audit costs ~$10K) and this can be possible/legal. Definitely consult securities lawyers if you're considering doing anything like this.

I think the traded for something angle is key here. And, of course, SEC is generally happy when consumers benefit, and fines when they don't.

But, I would think a line of defense would be that participants knew they wouldn't necessarily get anything for participating and presumably agreed to that in contest terms. At that point, the contest is just a giveaway -- and you can, in fact, give away stock.

OMG. What a smart move and an amazing investment. The guy probably saw 1,000 x return.

Um... Why do you believe she wasn't onboard with it? Or that $18k was an amount of money that represents an unacceptable risk for them?

I didn't see anything in the article stating that she disagreed with the decision. Or that that amount of money will actually be missed. 18k is peanuts to many people.

Business savvy people who have a LOT of money often have a "risky investment" fund. Hell, I have a very small risky investment fund myself and I only have a moderate amount of money.