Stock Options - What's Fair? 67
will-code-for-options asks: "I work for a technology company that makes stock options available to its employees. Assuming there is a correlation between employee title/rank and the number of options awarded; what do hi-tech professionals consider a 'fair' stock offering to be? What would be a 'generous' offering? Obviously there are a tremendous number of variables that influence a company's stock offering policy; all I'm really looking for are some data points to help serve as a guide. The (potentially complex) responses to this question could really help those of us who haven't had experience with the stock option lottery." Ask Slashdot last touched on this subject in the early days of 2000...needless to say that the economic climate has changed since then. Are stock options still worth anything, in today's economic climate, or should they be avoided?
pin drop.... (Score:2)
Re:pin drop.... (Score:5, Interesting)
Since 1999 I've got probably 17,000 options for the company I work for (I'm posting anon since my previous posts would identify said employer) in the computer field. A fairly large company that anyone who reads
Of those 17,000, only 2,000 are going to cost me less than they are worth, and only by a bit over a dollar. Those haven't started vesting yet, either. Of the rest the exercise cost is $168,000 and their market value is $42,000 (at one point they were worth nearly $750,000 on paper but weren't vested so I couldn't exercise). Of course, most of those have at least partially vested by now but they're upside down.
I also participated in an employee purchase program
Options are a leash if you buy into them. I've been with this company for 4 years yet it will be another 4 years before I see anything significant from the stock options (and that's not counting the loss from the purchase program). Don't let options be a part of your decision to go to a company unless you vest FAST or you are so brainwashed that you -know- the company will be growing in 4 years.
They are great if you get lucky and make money, but it is no guarrantee. Don't let the offer of options let you settle for less salary than you are worth. I'm lucky, my salary is probably a good bit MORE than I'm worth, so I just look at the options and cynically chuckle.
FYI, www.mystockoptions.com [mystockoptions.com] has many useful tools to help people manage their options and do calculations on them.
Maybe this is crazy... (Score:2)
Re:Maybe this is crazy... (Score:2)
Sometimes options only go to the top executives, and the lower folk got some type of stock plan to buy
A bonus (Score:4, Interesting)
what I mean is always consider the chance that they will be worthless.
I'm currently stuck with a zillion $50 options for a stock that is right now worth ~$5.
(and I considder myself - lucky I didn't lose any real monny, just Imaginary munny.)
Newsweek (Score:2, Interesting)
http://www.msnbc.com/news/937817.asp [msnbc.com]
If I owned my own company.... (Score:2)
Of course, there'd be nothing to prevent you from getting dividends on the stock, so you'd make a little money from it in the meantime. But I don't want anyone working for me who plans to artifically pump up the stock price and then bail after they cash out.
Re:If I owned my own company.... (Score:1)
One thing that might well discourage getting dividends on the stock is whether the company happened to issue dividends or not...
Re:If I owned my own company.... (Score:4, Interesting)
* Forcing one to quit to sell stock is -not- an incentive to stay.
* Most option plans have a vestment schedule that means that the person with the options can take anywhere from 3-5 years to be able to buy those shares.
* Furthermore, if you immediately sell stock you bought you take a larger tax penalty than if you hold on to it.
Those last 2 bullets are what companies use to keep employees locked in with options. Very rarely will a company grant options that can be immediately turned around. I know in the case of the company I work for I vest a grant over a 4 year period. Once per month I get 1/48th of the grant vested.
Re: (Score:1)
Re:If I owned my own company.... (Score:2)
You don't suppose your employees might want to do things like buy houses or send kids to college, eh?
Corporate pride & intelligent financial decisions are two discrete things. Ask all the poor bastards at Sun or Intel who lost hundreds of thousands of dollars about that.
Zero-interest risk-free loan (Score:3, Informative)
Re:Zero-interest risk-free loan (Score:3, Informative)
As far as valuing them, there is no need to guess, simply use the Black Scholes formula. You can find it at http://home.online.no/~espehaug/SayBlackScholes.h
(Who says business people aren't good for anything!)
Re:Zero-interest risk-free loan (Score:2, Insightful)
Re:Zero-interest risk-free loan (Score:3, Insightful)
Slightly off-topic, I think that if you really believe in a company and the company really belives in you, then both sides should be looking into some kind of stock purchase plan.
If a techie doesn't want to climb management and have the "security" that comes with having power over people, then the said techie should look into OWNING a piece of the company and havin
Re:Zero-interest risk-free loan (Score:2)
There is a name for corporations that are run by their IT departments, and that name is "bankrupt".
Most techies don't know much about business, just like most managers don't know much about tech. Knowing how to run the corporate network doesn't mean squat when it comes to say, marketing your company's product, or negotiating with suppliers and custom
Re:Zero-interest risk-free loan (Score:2)
But there is a difference between running a company on a day to day, and having a say in the direction, business practices, and general policies of a company.
Most individuals don't know squat about how to manage highway projects, plan transportation systems, or zone properties to ensure the growth, health, and prosperity of a city. But that doesn't mean citizens shouldn't have a chance to read what the city's commissions find and have a say in the direction they want their cities to g
Options for seniority? (Score:2)
Assuming there is a correlation between employee title/rank and the number of options awarded...
Uh, I'm not sure which of your orifces you pulled that assumption from but I've never heard of such a thing. I've always seen options given out to employees whom the company values highly and wants to keep for the long haul, independent of their title/rank/seniority. People who have been with the company long enough to achieve some measure of title or rank probably have quite an investment (financial, emotio
Re:Options for seniority? (Score:1)
However, at the executive level things escalate. I doubt that genious developer sees 5% of the shares offered to anyone at the VP level and maybe
Options seem less prevalent now (Score:3, Insightful)
It seems that other companies are less likely to use options as the big enticement they were used as a few years ago. Most of the people I know got few if any stock options when they were hired. Six or eight years ago, it was almost expected in high-tech. I think the bubble popping had a lot to do with this. Whether it's a case of the prospective employee thinking that stock won't be worth anything, and is therefore valueless as a "benefit", or the employer wanting to use more directly obvious compensation, I don't know. Since it's a buyer's market, companies might not feel the need to use options as a lure.
Offhand, I'd say that if the company has a good 401(k) match, good health care, job security, and offers a reasonable or generous salary, treat any options you get as just a possible bonus later on down the road. Put another way, you shouldn't count on them being worth anything, and so they shouldn't factor in as compensation when deciding to take a job or not (don't give in to arguments like "Company A is giving more options, but Company B pays more..."). Although there are worse decisions to have to make, eh?
-B
Buy low, sell high (Score:2)
That said, I generally think of stock options as if they're a gift of lottery tickets. They're free; they could pay off; but unless you're in a very small company (or very high u
Stock (Score:1)
Watch out for tax liabilities (Score:2)
IANAL, so don't take this as legal advice but you should watch out for tax liabilities that may come with stock options. The worst case scenario may turn out to be you paying taxes on paper profits even though your options become worthless.
Re:Watch out for tax liabilities (Score:2)
I think the Age of Options is over (Score:5, Informative)
Okay, here is my take.
Options are really worth it if you are in on the ground floor. I have a neighbor who was one of the early Red Hat employees. From Edgar it looks like he had ~500,000 options at about a buck. Considering they split twice, he was looking at ~2,000,000 options at about a quarter each. He's retired now.
My case was different. I was a grunt in a company that went public. I was granted 6000 options at US$4/share, to vest over four years. On my first year anniversary, I had 1500 shares and the stock price was US$44/share. Now, while my boss (who had over 144,000 options) was driving a new Porsche, I was not going to retire on ~US$60K, so I decided to exercise my options, yet hold on to the stock for the long term capital gains (keep it a year, pay less taxes).
A year later the stock was less than US$4 a share. Also, there is this thing called the Alternative Minimum Tax (AMT). Imagine my surprise when TurboTax told me that the government acts as if I had actually made US$60K that day, and it wanted its share: US$20K.
Yes, I am an idiot. Yes, I lost my shirt.
The moral? These days, options aren't that valuable unless you have lots of them. Also, exercise them as soon as you can.
What's funny is that senior executives are now refusing stock options and asking instead for preferred stock. Preferred stock pays high dividends. Under the new rules, dividends are not taxable as income. Go figure.
Re:I think the Age of Options is over (Score:1)
Uh, here is at least one of the splits. [com.com]
I do believe there was a second as well, but I am not going to do your homework for you. This was the first hit on Google: "red hat" stock split.
As for options, the whole point is that the option price is less than the stock price - or else it would be much of an incentive, now would it? He had the option to buy Red Hat shares at about a buck, which, as you so astutely point out, is below the lowest price that Red Hat has ever traded.
As for the amount of opti
Re:I think the Age of Options is over (Score:1)
I did a little snooping on what a friend of mine could've made as a contributor back when the whole redhat IPO initially caught press and RH announced that they were going to offer options to said contributors.
Optimax take was ~$150k US at maximum investment from the private contributo
My advice (Score:1)
Re:My advice (Score:1)
Be lucky you're employed (Score:3, Interesting)
is my general response - this is no longer the stock option era we were in before.
But for a datapoint from the past, at WorldCom the "good" package for well-liked VPs and senior technical staff was worth on average about 150-250k/year pre-tax value after cashing them out (if you did so immediately). Of course that's all very rough numbers, dependant on values that they could have only vaguely predicted. They were good for another 7 years afterwards which could have led the values much higher, or could have led the values way below zero (as happened to be the actual case for those who didn't cash out back when they had the chance).
The "standard" package they gave virtually every full-time employee by contrast was worth on the order of 5-15k I think (I don't remember for sure what they were valued at).
Learned Anything? (Score:3, Interesting)
In other words, options are not for your benefit, they're for the company's benefit. So, depending on how much and for how long they want to tie you up, they'll offer more or less, vesting on such and such a schedule.
While options might make you more likely to hang around and bust your hump, they give the company incentive to dump you if it looks like the options might end up more valuable than your continued presence. I've seen this: a friend was at a startup that laid off all its developers just before they got any vesting, and hired a new, smaller crew to finish up. The same friend worked at another place that, when it was bought, invalidated all their options and assigned new ones, and reset the vesting clock to zero.
It's only after you start the job that the options affect your choices. Then, you trade off future value of the unvested options against other opportunities. That is, unless you don't plan to be there very long. Even then, it might be unwise to haggle for a bigger salary and smaller option package, 'cause that will make them think you don't plan to be there very long, or don't hold out much hope for their prospects.
Since options' value is so uncertain to begin with, and because companies have so many ways to drain whatever value they might gain (e.g. dilution, strategic bankruptcy, mergers) you're usually best off just ignoring them until they vest, and then exercise and sell them if you can (yet).
Quantity of stock options doesn't matter (Score:4, Insightful)
What you want to do is figure out what your percentage of the company is, then ask their HR person for a count of shares outstanding and do the division yourself.
The otherthing you can do is just say "I want options for x.y% of the company, make it happen
Anyone who says you need at least 10,000 options is silly
Very simple (Score:5, Insightful)
This is an easy question, although you have to make a whole bunch of wild guesses to answer it. Here's how:
Look at the options you're being offered. How many shares, at what strike price, what vesting period and what expiration. The first thing to look at is the vesting period, and decide if you're likely to be at the company that long. If not, go no further, the options are worthless to you.
Assuming you're going to be around long enough to vest, look at the current stock price of the company and make your own best judgement of what the company's prospects are and what you think will happen to the stock price by the expiration date. A good way to do this is to decide how much money you think the company will be making every year at expiration (non-trivial, but do the best you can), multiply by the expected profit margin to get your guess at earnings, and then multiply by, say, 20, a conservative price to earnings ratio. Be conservative in your guesses; especially since everyone at the company is going to be really optimistic.
Now, you have two numbers: Expected stock price at expiration, and strike price. Take the difference, multiply by the number of shares and you have what you think the options are worth.
Now consider the fact that this money isn't money you get right now, but money you get in X years, so discount it somewhat. Say 5% per year, so if the options expire in 10 years, figure the money is only worth half of what you just calculated. To be really thorough take some taxes out of it, too.
Now look at that dollar figure, which is a really rough but usable SWAG at the net present value of the options offer, and decide if you think it's reasonable. At this point it's just dollars, and we're all much more familiar with evaluating the worth of dollars.
If you like spreadsheets, you might try making up several guesses at the future stock price, weighting them by likelihood (more guesses!), do the calculation each way and then make a weighted average to get a better guess at the value of the options.
There ya go. Employee Stock Options 101.
Re:Very simple (Score:2)
then multiply by, say, 20, a conservative price to earnings ratio
Er... don't forget to divide by the number of shares that will be outstanding then to get the share price. Yeah, that's yet another guess, and a fairly hard one, too.
stock options = underpay (Score:2)
A not-yet-profitable company uses stock options to keep employees around until the company becomes profitable.
A profitable company either doesn't issue stock options, or it issues them to suckers who will take them in lieu of a real salary (see Microsoft) as a way to limit per-employee costs.
If you're
Re:stock options = underpay (Score:1)
Very simple. All you need are made up numbers. (Score:2)
S'easy. Take the price that options are offered at ($x per share) and make up a number that you think they'll be worth when they vest (usually over 3-5 years) ($y per share). These options are worth ($y - $x) per share.
The problem, of course, is you have no idea what $y will actually be, but, hey, that's life.
But, on the useful side, here are some things to watch out for:
Most stock options vest over a certain number of years.
A good rule of thumb... (Score:1)
A generous offering of stock options in a pre-IPO company would be 1-3% of the employee's salary in options. A small company starting out might even consider between 5-15% to boost employee interest. For example, if employee earned $50k a year, then
There was a rule of thumb I read once (Score:2)
Of course you may luck out, and sell them at the high point and make much more than that, but it's never possible to know where the high point was until the stock has tanked.
Basically, they're typically worth very little, but employees imagine that they're worth a lot, and that's why employers think that they are good incentives ;-)
Ask ESR (Score:2)
> today's economic climate, or should they be avoided?"
Ask ESR, he should know. [slashdot.org]
Re:Ask ESR (Score:1)
how about cash instead? (Score:2)
There is a rationale behind giving executives and others with enormous individual impact on the corporations a stock-position. It encourages them to act for the good of the company.
But normal employees -- just give them an equivalent amount of money. It is a bad idea for employees to be invested in their own companies stocks anyways, as they will make irrational and
There are correllations, but it's not easy. (Score:1, Interesting)
The most important variables that I've seen which would impact your option package are when you joined the company w.r.t. its current market position, and how senior you are. There IS a
Stock Options.... (Score:1)
The only difference I suppose is that the government had more at stake unless thier assets
quick n simple (Score:2)
Your company *will* have a projected budget for 2-4 years down the road [otherwise, don't take the job]. From that they can compute what the Stock share price should be around that time. Divide your position's mean salary by stock price, and that's likely the # of options over a 4 year period.
If your company is public:
Use the 1yr projected price instead.
[note: if you're a director or better, multiply by some constant, which is directly proportional t
Pricing options (Score:2)
If your company is publicly quoted, you can work out the value of the options for yourself. Get the historical data for the share price and crunch it through the Black-Scholes algorithm (any derivatives textbook will cover
Just got some as a bonus. (Score:2)
We are primarily a contractor based company so when the office I work in wins a big contract they award cash/stock options to thoses who worked on the contract. In addition they identify "key people" in the contract, theses people get stock options if they work on the cont
A danger of stock options (Score:2)
Public company, trading at $10/share.
You make $75K/year.
You are granted 10000 options - you have to wait 6 months to sell.
Tax year ends.
IRS sees your grant as being worth $100000, applies AMT and says you owe $33,000 on top of your regular taxes (say $10000).
Dot-bomb.
You stock is worthless, you never got to sell it. Company closes down, you're out of a job.
You still owe $43,000 to the IRS.
Re:A danger of stock options (Score:2, Informative)
The Alternative Minimum Tax (AMT) will treat you as if you had income equal to the difference in the strike price and sale price on the day you exercised the options and you will be liable for the income tax on that amount.
Just being granted options that happen to be in the money will not cause this problem.
Re:A danger of stock options (Score:2)
Ah, that makes more sense, thanks. And the reason to do this would be to get long in the stock and wait it out so you can cash out at long-term capital gains rates?
Note to self: put in a limit order.
Bit of advice (Score:2)
With that said: If you are being offered options, take them. As soon as you vest, cash out. Otherwise, your emotional ties to the company will cause your good judgement to take
Another data point (Score:1)
For instance, let's say the bonus percentage is 15% for this year. If an employee is making $60,000 a year, he or she will get $9000 worth of company sto
Stock options? No. Try SALARY and BENEFITS. (Score:2)