The numbers were fictitious in order to work the example. Our CFO in conjunction with our general counsel determines the effective valuation which is ratified at the appropriate board meeting and becomes the official strike price until the next valuation 'event'.
There are two numbers in play, one is the value of common stock and one is the value of preferred stock. Preferred stock is used in conjunction with raising capital and often has terms and covenants attached to it which make it significantly more valuable than common stock early in the company's life cycle where they effectively converge on the same value at the IPO (or 'liquidity event')
That said, the example is illustrative but not strictly accurate (accurate in principle but not in execution). What really happens is that you run out of money faster with a higher salary load, and that means you may need to raise additional funds sooner. That fund raising round would proceed like any other round, caveat your 'target' now includes an additional $200K to cover the salary you're paying out. Worse that stock you sell will be preferred and not common stock, and as such might have preferences like 2x return which would further reduce the benefit to common stock holders in the event of a sale or merger.
Its truly a good prisoner's dilemma game setup. If all of the employees take large common stock grants and low salaries they all benefit more on a non-IPO type event, if a few take big salaries they can make the threshold for everyone else benefiting higher, thus by not co-operating get a better salary and reduce total compensation of their peers.
There are two numbers in play, one is the value of common stock and one is the value of preferred stock. Preferred stock is used in conjunction with raising capital and often has terms and covenants attached to it which make it significantly more valuable than common stock early in the company's life cycle where they effectively converge on the same value at the IPO (or 'liquidity event')
That said, the example is illustrative but not strictly accurate (accurate in principle but not in execution). What really happens is that you run out of money faster with a higher salary load, and that means you may need to raise additional funds sooner. That fund raising round would proceed like any other round, caveat your 'target' now includes an additional $200K to cover the salary you're paying out. Worse that stock you sell will be preferred and not common stock, and as such might have preferences like 2x return which would further reduce the benefit to common stock holders in the event of a sale or merger.
Its truly a good prisoner's dilemma game setup. If all of the employees take large common stock grants and low salaries they all benefit more on a non-IPO type event, if a few take big salaries they can make the threshold for everyone else benefiting higher, thus by not co-operating get a better salary and reduce total compensation of their peers.