What impact will Dropbox’s down-round IPO have on employees?

Probably none or close to none.

First, I highly doubt Dropbox will end up trading at < $10b so it won’t be a “down-round”. IPOs are priced conservatively. If we’re at $8b pricing at the IPO, I would be shocked if Dropbox trades below $10b its first week. It’s possible, but unlikely. Most IPOs are intentionally priced at least 20%-30% “low”. That bump alone will likely get Dropbox to $10b+ valuation, at least it’s first quarter out.

Second, early employees’ option exercise prices will be a tiny fraction of $8b-$10b, and later employees tend to get equity grants as RSUs that insulate them from most effects of a modest valuation difference. Perhaps Dropbox is giving out options with an $8b strike price, but I doubt it. Instead, they likely are giving out RSUs with a $0.00 strike price, with a value determined on a Black-Scholes analysis. Employees would then only make 20% less at an $8b valuation than a $10b valuation. A Black-Scholes analysis might grant an employee an expected $100,000 in equity value over a 4 year vesting period based on an assumed value (say $10b or $8b or whatever) and an assumed volatility in the stock price. I doubt the exact share price will have a huge difference. If the 4-year expected value is $80k at $8b, or $120k at $12b, the difference is real no doubt, but in the end, not hugely material and in any event, may change over the coming years anyway.

Put differently, I highly doubt very many employees will be “underwater”. This is the scenario folks worry about. They are granted say 100,000 options at say a $10.00 price, and the IPO closes at $8.00. In this case you are “out of the money” and that scenario is painful. But it seems very unlikely to be the case here. The early employees likely have options at 1/100th the IPO price (or less), and the later ones RSUs without a basis.

So the handful that have life-changing grants will still have life-changing grants at an $8b valuation, $10b, $12b, whatever. And the vast majority with RSUs or similar will still be “in the money” for modest amounts. A handful may be in the middle, but it’s likely just a few.

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Published on March 14, 2018

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