What are Share Options Worth? 124
jon_eaves submitted a thought provoking question on the worth of stock options. One only has to look at the recent IPOs of Red Hat [?] and VA Linux [?] to see why this might be desirable to someone in the market. Jon is looking for some discussion on the advantages, restrictions and risks involved in such dealings. Anyone out there with some good information or first hand experience into the things you need to watch for? Click below for the full submission.
"Hi all,
I'm in the process of looking for further employment, and one of the companies that I've been talking to is a start-up, and they have raised the option of taking shares instead of salary (or at least a portion of it).
I'm not super $$$$ focussed (or I'd be in SAP rather than Java), but to evaluate the offer against other companies, I'd be interested in hearing from other people who have taken share options, and what they have ended up being worth and what restrictions are "normal".
The sorts of things I'm interested in are;
- How long did you have to keep them ?
- What was the increase (or decrease) in value ?
- Do you think it's a good idea ?
- What are the "gotchas" ?
It's highly unlikely that I'll be making a choice based solely on $$$$, but it's important to understand the economics of it all.
Comments? "
Re:my 0.02 (Score:1)
How to get rich (Score:1)
2. win the lottery
3. stock options
No one gets rich making a salary (except some lawyers and doctors).
Know that your valuable. Work hard to prove it. Request options or leave to someplace that will.
I know of some folk who got into an established public company and within 1 year thier options went up %1000 in value. A $20,000 option became worth $2Million.
This sounds like fairy-tale but its happening all the time if your smart enough to get into the right place. Most people think getting rich is impposible so they never will.
I have personally made over $6 million in options in the past 5 years by joining up with the right companies and making sure I get what I want: Options baby, options WhooHoot!
Oh yeah -- dont sell. Thats another mistake. I know people who sell off thier options to pay for cars and crap and regret it later -- we are in a major tech boom its a little early to take the money off the table IMO. Someday computers will be like the entertainment industry nothing special and wont have the crazy valuations -- untill then ride the hype for all its worth.
we have a winner! (Score:1)
Then new options were granted. Not to be a sceptic, but the people who were running the company were connivers, and they were just trying to scam the board. Through some major structural changes, it became obvious that these bozos never had any intention of going public. Or maybe they knew we never had a chance. But they pretty much structured us for a sale.
Luckily, this story has a happy ending. I gambled, big time, by staying with the company through a huge layoff and restructuring. Most of the people I worked with had the option to BUY their options, (just what had vested at the time), but most didn't. A year later, we DID get bought. And by a nicely successful company. The stock has been on a rocket ride ever since.
About two years ago, before we were bought, I was thinking maybe we'd go public and I'd be able to like pay off my credit cards or something. This December, I calculated my options' value. I have made my first million. (this includes some unvested options). Not bad for someone who dropped out of art school. No degree. Now, I'm not saying I'm not worth my salt. Other old-timers, especially the schemers who set this whole thing up in the first place, made out like freakin bandits. Some guys are talking about buying lear jets, etc. You gotta love this industry. You just gotta.
On the other hand, I feel really, really bad about the guys who got laid off two years ago, and didn't get to keep their options.
What others have posted here - you gotta look at the risks and such - but most of all, you gotta look at the salary they ARE offering you. Is it enough to live on comfortably? If it squeezes you, try to negotiate for more options if you can. If your gamble pays off, you'll be very happy about it later!
I wish I had a nickel for every time someone said "Information wants to be free".
Being bought out by EDS ... poor you (Score:1)
Check out EDS' performance over the last several years ... they've had at least 3 rounds of layoffs in the last 4 years, and they've lost a number of contracts that they should have gotten, if their managers had been spending their time doing their jobs, instead of papering their nests. For that matter, their Herndon, VA, campus just built a brand-new building because EDS leased-out part of their existing building at a well-below-market rate, on a very long-term lease.
EDS may be the company that Ross Perot built, but it hasn't been well-managed since he sold it to GM in the 80's.
BTW -- EDS doesn't give out raises, ever.
The Gotcha (Score:1)
Re:my 0.02 (Score:1)
Stock as compensation? (Score:1)
Is it common for stock to be given out as compensation, directly rather than options? I am under the impression that I am being awarded $X in addition to my salary, and I will not be required to actually pay for these when the time comes; rather, they are a direct form of pay. Is this at all plausible or likely, or have I just been misled?
Wil
--
Internet Meta-Resources [nakedape.cc]:
To option or not to option... (Score:1)
Re:Link: The Tulip Bulb story (Score:1)
Today's "Internet" stocks are rather similar to the the hot stocks of the late 80s. Just 10 years ago biotechnology stocks were all the rage, giving outrageous gains of 50% (or more!) per year. Just 7 years ago they all tumbled rather badly, and most have not fully recovered.
on incentive stock options (Score:1)
Re: Wait a second... I can BUY my options? (Score:1)
Sorry, you cannot purchase your unvested options. Unvested means that you, in effect, have no current interest in the options, only that you will gain interest in them if certain conditions are met. One of those conditions is usually passage of a certain amount of time. If you lose your options before the vesting conditions are met, you're just plain screwed.
you're wrong. (Score:1)
Some skinny... (Score:1)
My company, Salix Technologies (www.salix.com) is currently between the announcement and the close of an aquisition by Tellabs (www.tellabs.com). So, I've been doing a lot of research on this since its quite relavent to me. =)
There are two types of stock options non-qualified (NQ) and incentive (ISO). The ramifications of either have to do mainly with two issues, vesting period and tax implications. I'll talk briefly about each.
Some people refer to NQ as the ``bad'' kind and ISO as the ``good'' kind. Its my opinion that they both have their advantages and disadvantages so these labels are not really applicable.
In general, NQ options will not vest immediately when an aquisition or IPO takes place and ISO options are generally set up such that vesting accelerates. As an example, lets say you have 5000 shares that vest over 4 years. If your company is bought in year 2 and you have NQ options, you'll probably still only have 1250 shares vested. If the options are ISO, the entire lot will likely automatically vest. Notice I use words like probably and may, each plan is individual.
From this description, you might wonder why you'd ever want NQ options vs. ISO's. The answer is in the dynamics of an aquisition or IPO underwriting. From the buyer's (or underwriters) perspective, NQs are better. Why? Because if everybody has ISO's they can walk out the door the next day with their money so your going to have to spend more for retention.
Ok, the other issue is taxes. When you exercise NQ options they are treated as regular income. When you exercise ISOs they are treated as Adjusted Minimum Tax (AMT) income. I won't get into AMT here but suffice to say, there is an entire other tax system out there designed to tax you when you get ISOs. Yes, it sucks. Anyway, AMT tax is basically a prepayment of capital gains taxes that you have to make due to a short term windfall, like an ISO exercise. While the rates are lower than income tax, you give the govt. your money much earlier so you lose the ability to earn interest on it yourself.
Anyway, thats a little bit about options that I hope helps some of you out there that might be being offered options.
Don't quit your day job.... (Score:1)
The taxes of stock options are tricky. IANATA. For those in the bay area (silicon valley), there is an upcoming course on stock options for employees (a one-day thing) offered by UCSC Extension. Click here [ucsc-extension.edu]
Re:Options don't substitute for salary. (Score:1)
(the time you are allotted the options is the "grant" date, the time before you can "exercise", sell, them is the "vesting period")
Exercising options is the act of purchasing the stock they represent. Your option plan then determines when you are allowed to sell the stock.
Vesting is generally a gradual process. e.g., I'm on an option plan which vests 25% of the options each year for 4 years.
Another thing to keep in mind is that you are often limited in how long you can hold onto them (in my case, I have to sell within 10 years of vesting).
Stock options always have time limits attached due to IRS regulations. Specifically, there are nasty tax effects if you hold the options more than 10 years beyond the date of the options agreement.
Stock options work this way: a company looks at the current trading value of their stock on the specified grant date and then purchases a certain dollar value or fixed number of shares of stock, which they set aside for you.
This description is tied to publically traded corporations. In more general terms, a stock option agreement allows you to buy a certain number of shares at their value as of the agreement's date (called the "strike price") rather than the price at the time of purchase.
The stock is held until the vesting period is over, at which time you may do one of two things: purchase the stock from your company at the price they paid on the grant date, or have the company sell the stock and give you the difference.
Selling off the options for the difference between the strike price and current price is called "cashless exercise". Not all option plans include a cashless exercise provision. Mine, for instance, does not.
There are also (of course) tax consequences involved with cashless exercise (or any quick turnaround) of Incentive Stock Options: If you hold the shares for less than a full year, the money you get will be taxed as normal income. If you hold the shares for a year or more, your profits will be taxed (much more favorably) as long-term capital gains. (The Alternative Minimum Tax comes into play here too, which basically means you must get yourself an accountant when you sell shares bought with options. If AMT comes into play, you pay more taxes this year, but can claim that extra as a credit against future years so, unless your income stays high, you'll probably get that extra tax money back.)
The other kind of stock options (I forget the IRS's name for them) are always taxed at the time of exercise, considering the difference between current value and strike price as (IIRC) normal income. The stock is then treated just like any other stock you may have bought and further profits are taxed normally as capital gains.
so they are not liquid, you cannot borrow against them, you see no income from them whatsoever until the day you exercise them.
This is actually somewhat dependent on your actual option plan, but will generally be true, except in the case of cashless exercise. (Technically, in a cashless exercise, the company or its bank gives you a short-term loan to cover the strike price, buys the shares in your name, immediately sells them, uses the money from the sale to pay off the loan, and hands over the rest of the cash. For all practical purposes, though, you're just selling the options for the difference in market and strike prices.)
I am, of course, neither a lawyer nor a tax professional. I just did a bit of reading on options a few months ago when I was offered some. You really should do the same.
Options == lottery (Score:1)
No difference in print version extended calculatio (Score:1)
"reasonable" hours at an establish company
versus breakneck hours at a startup.
Assuming a half-million IPO, the value of the
extra hours, the advantage of investing the
surplus from the normal job in the stock
many years before the IPO is vested, and so on,
Infoworld calculates a wash in financial terms.
The non-IPO persons has extra free time to live
a "real" life.
My Experiences (Score:1)
1. Two years.
2. 4500% (whee!) (down from 6700%; I think they got altitude sickness). At one point, they were down 10% from the original price, and stayed there for months.
3. Looks good to me. But always make sure you're earning enough to pay the rent - you can't eat options.
4. You're nailed down until the options vest - which is kind of the point from your employer's point of view. You need to check out the tax angle too - here in Australia you get hit by Capital Gains Tax when you sell the shares.
If you're joining a startup - like I did - I wouldn't bet all on striking it rich. On the other hand, if you have the choice between earning a huge salary, and earning a comfortable salary plus options, it's probably worth the risk. I never expected the options to amount to much; I was (pleasantly) surprised when I suddenly became a millionaire.
Re:Get the facts and apply common sense (Score:1)
I do agree, however, with your last paragraph wholeheartedly.
Important to consider the timing... (Score:1)
The company I work for gave me stock options as a bonus, with a vesting period of 5 years, basically to keep me from jumping ship any time soon. The company is already public & has a huge upside, so over 5 years those options will probably be worth big $$$. But, I have to work for the same company for all that time (gasp!!).
The important thing to remember is that stock options (and even stock, for that matter) aren't worth a cent until you cash them in. If you're young & just starting out, it's an exciting opportunity. But if you're at the retirement-planning stage of life, I think it's too risky to take as compensation.
--Mid
Re:Recent Infoworld article (Score:1)
ISOs (Score:1)
It varies, but usually over 4 years
2.What was the increase (or decrease) in value ?
Again it varies, depends on the company
3.Do you think it's a good idea ?
IF the company goes public, yes.
4.What are the "gotchas" ?
Capital gains taxes and AMT (alternate minimum tax). Its really nasty (see www.fairmark.com)
"Precise" Mathematical Options Valuation (Score:1)
By making a few basic assumptions about the underlying stock price, it is possible to derive an equation (solvable by computer) expressing the option value in terms of a few simple terms: The volatility is sort of how much the stock might be expected to vary in price.
Depending on the complexity of the option involved, some of this information may be unreliable or even unavailable, or more information might be needed (e.g. if the stock is in a foreign company but you measure wealth in dollars). But the spirit remains the same. For the most basic options, the orginal analysis is due to Black and Scholes, and was worth a Nobel in Economics (which Merton got to share, leading indirectly to his embarassment at LCTM). For a look at the simplest version of all this, check here [finance.bi.no]. A more thorough reference is Hull's book [fatbrain.com].
Now, unfortunately, some of those "basic" assumptions I talked about are quite clearly false in the case of the most interesting companies issuing options. In particular, you can't sell the stock short, the price is likely subject to jumps (rather than moving continuously), and the volatility is nearly unknowable. So for a start-up, the analysis is useless. But for big companies, it works quite well.
Ultimately, I would say that if you are considering options issued by a market listed company with a reasonably large daily trading volume, you can get valuable information from such analysis. But for a small start up, it's pretty worthless, and you should stick with the scenario analyses advocated by other posts.
Option as Carrot (Score:1)
For the post IPO organization it is another deal entirely. Generally, the real money is gone and the fighting is over scraps. The "stock option" is just a carrot to keep you there longer. So, you stay in your crappy job because it would be *stupid* to leave because you would forfeit your options. The organization has a vested interest in giving you more un vested shares to keep you ticking. Eventually, you wake up one day and find the best years of your life spent in some cube with annoying people and no respect. Most people I know with lots of potential money tied up in options are psychologically stuck in "just three more years" mode. In this accelerated world, the absolute worst situation to be in is to be in a situation you cannot leave.
In my world, a much better prospect is to work for a small flexible company that pays well, has interesting people, and offers opportunity for personal growth. If you cannot find one of these companies... then make one.
PS - As with every opinion, there are exceptions. Just realize that they are exeptions.
Re:First understand what stock option grants are.. (Score:1)
Umm... yes. Shares are shares. If you own them, you own a part of a company. I have many friends that work for private companies. The companies have a form of profit sharing where each employee gets a percentage of the company profits based on how many shares they own.
Just because a company is not public doesn't mean owning a piece of that company is worthless. There would be a lot of poor CEOs out there if private companies did not did not pay dividends or such.
First understand what stock option grants are... (Score:1)
From the way the question was worded, it sounds to me like you don't know exactly what stock options are, and you don't understand the processes involved with granting of stock options. You may want to search around and find some articles on what stock options really are. I found this (it seems to describe options well without getting too complicated):
http://www.hmbreview.com/opinion/stories/981119
1. How long do you have to keep them?
Zero. They are not yours until they vest. Well, when do they vest? Each company is different (ie you need to find out from your company). The company that I used to work for had a 4 year vesting period, where you would get 25% each year. For example, if I was granted 1000 options, I would get 25% (250 shares) after the first year, another 25% after the second year and so on until I had all 1000 shares vested. Once the options are vested, you are free to sell them or purchase them whenever you want (under the assumption that the company has gone public by that time)
2. What was the increase (or decrease) in value?
For me, $74 increase. Note that this company had already been public for several years before I joined. It was not a startup.
3. Do you think its a good idea?
I cannot stress this enough. Do NOT NOT NOT work for any company that does not offer stock options (or some other form of profit sharing) to its technical employees. If they do not, there is something wrong. The tech industry is booming. Working without the possibilty of sharing the success of the business is pure lunacy.
4. What are the "gotchas"?
At worst, you get nothing. The business is unsuccessful and your options are worth zero. At best, you are a millionare. You have abosolutely nothing to lose.
You mentioned that the company is offering a trade of salary for options. Take the options!! Just make sure that the percentage of total shares that you are given justifies the lower salary. (ie don't take a $10K cut in salary to get 100 shares out of a total of 100,000,000 shares).
My experience (Score:1)
At the first one (a prime source of evil on the net) we used to joke that there was a good reason why our logo looked a lot like an eye in a pyramid(which also appears on the US dollar). The company I'm currently with IPO'd in October at 17 and is now somewhere around 120 (after going as high as 170something).
When you ask what options are worth, you're really asking what the company is worth. Since it usually takes four years to become fully vested, ask yourself if this company (and the people running it) are really going to be around in four years.
These days a decent geek can get a job in about 15 minutes. Are you looking at this company as a real long term prospect, or just something to pass the time? If it's short term, just look for the most cash you can get right now.
The most important thing is, will you be happy at this place, working in a very stressful atmosphere (as all startups are) for four years? Four years from now, what job will you be doing for this company? Will it be the same as when you came in, or will you be promoted? If the tech they use bores you, or you don't like the people, or they don't give you free sodas and coffee, then go somewhere else.
Unless you believe in the company, there's no point in rolling the dice on them. There are just too many other places you can work right now. Do what you love and the money will follow.
Re:How to get rich (Score:1)
Inheritance
-----------
"You can't shake the Devil's hand and say you're only kidding."
Optios into re-organization? (Score:1)
Pragmatic Passion? (Score:1)
If you are including financial factors in your decision, another important thing to consider is that the earlier you invest money, the more it is worth later. Therefore, thousands of dollars of salary are worth a fair amount more than those thousands of dollars realized four years later.
I find money is sort of like an invisible boulder; I can't see it, but it has undeniable properties of mass and displacement. It's hard to think about it clearly, or even to fully believe that it really exists and is mine, but if I set up automatic processes to deal with it, then it more or less takes care of itself. Automatic deposit was a godsend; so was setting up my account to automatically dump money into a mutual fund. Then I could look around and realize I really could <fill in the dream here>.
Here are my three proven secrets to financial happiness, all cribbed from my boyfriend who is really very clever on this topic:
1) Save money for retirement. 401(k)s are a great way to do this if they're available to you, even if your company doesn't match. If your company does match, it's free money! It'd be silly to turn that down. These are great because of compound interest. I put about 4 years into one about 5-10 years earlier than most people start and it will be a major factor in my retirement, if not the sole factor.
2) Keep an emergency fund. I used to go into a gibbering panic when a car broke down, because it could ruin me financially for six months to a year. Now we keep enough money earmarked to cover big car repairs, or health insurance deductibles, or an emergency flight home. It does wonders for peace of mind when you have the funds on hand, and a plan for how to refresh them after the emergency (monthly small payments, and count on law of averages to not feed you more than 2 emergencies in a short time.)
3) Budget for luxuries! This was a hard one to drive through to me; I assumed that if I was saving for something I should save all-out. No fun now for fun later, was the thought. This was a very silly way to behave. Luxuries for me have been as small as canned tomatoes or meat to add to my rice and beans, to an occasional movie out, to as large as buying a nice used car, as well as the rampant comics habit (or is that a necessity?). Luxuries are compared to your current baseline lifestyle, not to everyone else's, is the thing to keep in mind. We had a year where we had saved up $400 to go on vacation; when we realized that that would get us two days stay somewhere and not even cover the gas to get there, instead we took a week off, stayed home, and went to all of the restaurants we couldn't normally afford. Okay, maybe this sort of thing isn't much of a problem for your typical highly paid geek.
The basic theory here is to make sure that your present, short term future, and long term future needs, both tangible and intangible, all get met.
Which leads me to the passion part. I don't think it is worthwhile to work somewhere that demands the amount of work a typical startup will without it meeting those needs; it really really helps to be passionate about it. If you really love the company, then it's fun. If you don't, then it can be torture. For me a big factor is: "are we doing something cool? Am _I_ doing something cool?"
Startups are really crazy; I went looking for another startup precisely because I loved the energy and craziness of the first one I ever worked for. It pays off in a lot of ways besides money: working with clever people on hard problems is its own reward. I love working with people I can respect, and I love being put under pressure, even though the effects on me can be pretty grueling. On the positive side, the pressure is a big engine that makes me push myself harder than I usually would; I've possibly learned and done a lot more in a fraction of the time than I would have at a fun but more static Big Company -- because I had to!
Not to knock Big Companies; the people there were great, and I still sharply miss working with them. But a large reason why I left was because I wanted to try walking the tightrope for a while. And it's hugely worthwhile to me because of the intangibles. The options are more of a reminder that everyone at my company is in the same boat: we _all_ have a vested (no pun intended) interest in seeing the company succeed. I don't think it would be nearly as worthwhile if I were only "in it for the money."
Options are just a gamble (Score:1)
10 years ago a start up would often give an employee stock options because of the cash flow issues of giving them money. To keep the person around they would offten require that they stay with the company a number of years (as much as 10).
In todays world of rocket like IPO's it seems that it is no longer the incentive it once was. Compaines can get cash qucikly and don't have the problem of cash flow 2 years into a project.
With one start up we divided the value of the company by the number of hours worked. At one time I had about 10% of the company but years after I left and its worth millions, my % is so small I don't even want to think about it. I was in a better position by walking away from it. Sure I lost big on paper but I got to eat in the meantime.
I guess my only advice is don't take options in leu of decent pay. Look at options as an additioanl incentive that just might make you rich. I've meet people worth hundreds of millions on paper because of their options (that they could not sell) but are broke because they spent like millionares and the stock fell. Don't get caught up in that trap.
Restrictive stock vs Stock options (Score:1)
-restrictive stock: Stock holdings or owned stock. With restrictive stock you end up getting a certain percentage every so often at a locked price, ala stock options, but you actually own the stock from the get go.
-stock options: Locked stock price where you have the option to buy at a certain time, over time.
Typically: 10% now, 20% a year from now, etc.
So yes stock options have value, but you have to purchase them. If you took stock options has a salary then you will be broke, because you won't have money to buy the stock options.
Stock options are sweeteners (golden handcuffs) not a replacement for salary.
Re:offtopic but Age Discrimination is BOGUS (Score:1)
But I've never worked for anyone who valued good design and long term thinking over the ability to put in 12 hour days to make the next demo milestone.
What area of the country are you in and what does your company do?
Regards,
Loopy
stock as pay vs. stock options (Score:1)
All the rest of the discussion around the *eventual* value of the stock is right on. You had better believe in the company, and you must be prepared to work your ass off to maintain the value of your "investment", which is what this really comes down to.
Dollar value not the only measure (Score:1)
Being granted options in a company should really be thought of as separate from the compensation package. It's about ownership as much as about money. I wouldn't work at a company that didn't offer me some amount of ownership; call me an evil capitalist but I like to be involved with the direction of the company, whoever small that part may be. Once your options vest though, if you exercise even 1 of them, you become a stockholder in the company, which grants you a number of rights that you wouldn't otherwise have. Exactly what rights vary from stock plan to stock plan, and from state to state (the state where the company is incorporated typically, not where it is physically), but they will always include a right to access to financial details not available to non-owners, review of details of board meetings, and *advance* notification of major company decisions that require a vote of the existing shareholders (this includes things like subsequent investments, acquisitions, IPOs, etc, etc).
I also would never hire an employee who wasn't willing to take stock options. Taking an options package shows an interest in the growth of the company beyond simply trying to maintain the existence of your job. Employees that I hire *really fast* are the ones who ask me if they can take less cash in exchange for more options. Whether the company succeeds or fails in the long run is not simply a matter of the performance of the management team. The whole company has to pull together, through thick and thin, and all be focussed on the same target, which is the growth of the equity of the company. Curiously, this is also the goal of just about 100% of investors out there too. Capitalism is about competition, but to be truly successful in a capitalist world, you have to cooperate too.
offtopic but Age Discrimination is BOGUS (Score:1)
I think it is foolish to believe that most companies only want development staff with tons of energy, no life, familarity with current favorite tools and nothing else to recommend them. But only such a basic priority widely present could lead to the claimed age discrimination.
More Gotchas (Score:1)
There are a couple of gotchas which haven't yet been mentioned:
1. Look out for "no-compete-clauses" tied to the options. Generally, the no-competes that companies try to saddle you with are unenforceable (IANAL), but they become significantly more enforceable if the company ties the agreement to something of real value, such as options.
2. At my company, your options - even vested options - can be taken away if you are fired for cause. Don't think that you are immune to being fired "for cause" if you are a good guy. HR people are weasels and these days tend to fire first at any complaint. Given the rise in the strategic use of harrassment/prejudice complaints in office politics, you just might get burned. The solution to that is to cash out your vested options when you are in a positive position, transfer them to an account not owned by your company, and hold them if you think the value is still going to skyrocket.
Re:taxes are VERY important (Score:1)
When a company gives you options, you will owe taxes on the value of the option, not on the strike price of the option. In most (99.9%)startups, options have zero value until the IPO or buyout because they are "out of the money" (market price less than strike price, because there IS no market price).
This means that the vast majority of option grants for startups are basically tax neutral. Option grants of existing companies are going to be valued at market - strike basically, and WILL count as income. Most companies will equalize you for this income tax, especially if you raise it as an issue with them.
This brings me to something I haven't seen anyone say yet. If you are going to a startup and they are talking significant options or even percentages, GET A LAWYER to look at their corporate structure, their regulations and shareholder agreements, etc. YOU DO NOT KNOW everything you need to to tell if you'll get screwed or not.
There are myriads of complexities. LLCs vs. Corps. Units vs. Shares. Vesting plans. Vesting Plan accelerations. Tax implications now and at the time of the event. On and on...
- Crash
Valuing Options (Score:1)
Watch out for legal "gotchas" (Score:1)
* Qualified vs. unqualified: many option plans that startups throw together turn out to be "unqualified", which means that there are severe tax implications when you exercise the options. You should make sure that the options are "qualified".
* Exercising constraints: exercising the options, i.e. converting the options into stock itself, is the most critical phase of an option plan. Make sure you understand any limitations in your ability to exercise the options. For example, what happens when another publicly-held company buys your company? Can you exercise your options for stock in the acquiring company, or are you forced to exercise them at some much lower price determined by the management of your current company?
* Time limits: there may be a fixed period for which the options are valid, after which they turn useless.
* Liquidation constraints: does the company reserve the right of first refusal for buying the options back from you? What possibilities are there for liquidating the options before the company goes public or is acquired (which could take much longer than expected)?
Entrepeneurs know that option agreements are a very effective way to get the most out of their employees, but at the same time they need to maximize their flexibility by keeping as much equity as possible in-house, so they will inherently try to protect themselves with various escape hatches. Again, make sure you carefully check out the agreement before you commit to it as part of any employment agreement or compensation plan. It is worth the $100-200 to have a laywer examine the agreement document.
Re:More to watch for... (Score:1)
I worked at a small company that has now gone public and many people are now wealthy on paper.
But, what people are paying in taxes varies from 28 1/2 % state & federal up to 45% based on when they exercised.
The people who gambled and exercised early protected themselves from AMT and short term capital gains. They might have had to take on a little risk to do so, but if they were not into risk they should not have given up pay for options.
eyes wide shut (Score:1)
you really need to know four things:
stock options are a form of IOU. I have started more than one company, and I personally have committed to the people who I work with, work for, and who work for me, that I will make good on my promises. If I have to sell everything I own to make good on my debts, I would do that. Not many people are really willing to make that kind of committment to you. As a result, stock options are worth nothing, because you cannot spend them, trade them or sell them. They are, as someone above said, a form of lottery ticket, and their worth is exactly as high as the value you personally place on them.
There is no such thing as a product -- all software, all hardware, all web sites are tools that facilitate the users' experience -- they are a way for people to do things they need to.
Is what the company doing a valuable service, oriented towards helping the most people do this particular thing the most effectively? If you believe in what you the company are collectively trying to accomplish, the then service has value, and the options probably will too someday. If you are as a company trying to take something from the market, instead of give something to it, you will probably not succeed. Unless, like the Microsofts of the world, you already have.
You may be rich someday, but you should be worried about what your life will be like on a day to day basis, because that is how you spend your time. Can your work with these people? Do you like and trust them? Are you certain you will enjoy what you are doing? Can you live comfortably on what they will pay you?
If you can answer yes to these questions, you will be far happier than if you are merely wealthy.
When you work for someone else you are being used. And, you are using them. Your goals are probably not theirs, and vice versa. This is not a "be paranoid trust no one" speech. This is a "know what you want and make certain you're being helped in achieving that" strategy.
I have a friend who got "bought out" with a half a million in options. It turns out that company was "buying him" to add to their package (their company) that they were in the process of selling. He got caught in the shuffle, and he decided at one point to forego that money (and he could have used it) because the job he was going to get wasn't going to make him happy.
He also got stuck because he took the equity based on the assumption that it had immediate value, and found out that what he really had to do to get the money involved a lot of time and hard work he ultimately did not want to invest.
My advice is find a way to do what you want to do, and if you happen to cash in on the process, so much the better. If you focus on the latter, you will ruin the former, and in the end, you will wind up with nothing of real value.
$.02
neil verplank
my 0.02 (Score:1)
That depends on the company - sometimes 6 months sometimes a year.
What was the increase (or decrease) in value ?
For every Red Hat or VA, there's a company that tanks.
Do you think it's a good idea ?
If I'm sold on the product and the management team. Both have to be there.
What are the "gotchas" ?
Wow - there are a lot. It's always a crap shoot, and the current trend of "instant gazillionaires" certainly won't last forever. But I think that if the product is solid, and the management team is solid, there's a good chance to make some money.
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Re:COME WORK FOR ME FOR FREE!!!! (Score:1)
Somebody's already doing the software side of this. Perhaps you can offer to help them out with the hardware side.
y2k info - http://www.ecis.com/~alizard/y2k.html
taxes are VERY important (Score:1)
Keep in mind, short-term capital gains taxes can take something like 30% of the profit you make from cashing in your options. In order to alleviate this, purchase your options AS SOON AS YOU GET THEM. You don't have to be vested in order to purchase the options. If you wait until you are vested before you purchase the options, you will have to pay tax on the difference between what you're paying for them (often less than a dollar a share) and the market value on the day you purchase them. The government treats this difference as compensation from your employer, so you are taxed as if it was your salary.
The best scenario is that you'll get hired when the options are 50 cents apiece. You buy them for a few grand on the day you're hired. Work for the same company until you're completely vested. This means that when you sell the stocks, the profit will be treated as long-term capital gains and you will pay the smallest amount of taxes possible. Consider the difference between short and long term capital gains taxes on a million dollars to be something like the cost of a new Lamborghini. That's about the cost of two new Ferraris.
Cuidado. (Score:1)
There is difference between shares in lieu of pay and stock options. A big one. Obviously an option is just that, an option. No one is forcing you to buy shares. Depending on the structure of the option you may only be saving transaction commissions. Your mileage may vary.
If you are getting ownership concern as part of your compensation, you're in a different situation. New start-ups will do this to bring in centerpiece talent. If this is so, you probably need to adjust your "I'm not super $$$$ focussed" attitude. The success of the company is now more important to you than it would be to the average salaried employee. That's why corporate BODs structure corporate officers' compensation with lots of stock. The company's share price acts like a commission incentive.
Do NOT do as I did! (Score:1)
If you are seriously considering doing this and the amount of money is significant enough, I would go to a good landshark and get the situation evaluated. There's a difference between non-qualifying options and ISOs and the tax laws are complicated and definitely *not* user friendly. (Aside-- why can't the tax office get a user interface design overhaul?). You're goign to need to know lots of things like the grant value, the market value, the vesting time, etc.
Please moderate this up (Score:1)
Stock options can easily be worthless (Score:1)
I vest at 25% per year.
Back in September or October, our stock was down to around $20, meaning even if I could exercise the options there would be no point. At that time, as a form of apology (more or less), I was given 1500 more options with a buy in price of around $20.
Right now the stock is at $30-35.
Here's the real problem, I can't stand my job and I'm really looking to escape. So even if I'm there come February chances are the most I could make would be $2-5/share, which isn't that great. Frankly, I have little confidence in this company and suspect that their stock will go down again.
My advice, unless you think this company you're going to work for is going to be a long term home, ask for more salary/vacation/up front goodies rather than stock. You can always invest wisely and make a profit and you can always enjoy time off. Note that my experience was with a company which was already public when I started.
A pre-IPO company is a totally different situation, particularly if they go public and then experience a takeover. In that case, you could be rolling in it.
Size of the ride metric. (Score:1)
To calculate the size of the ride(tm) take the amount someone last paid for the stock (ask them or look it up) and multiply it by the number of shares they are offering you.
The size of the ride(tm) is interesting because it is the size of the investment you would get if you had money (and access) instead of talent. Think of it as the company "Placing a bet in your name".
You will find deal vary widely.
This is only one metric, but if it turns out that someone only made a 10K investment to get the same amount of stock that you get for 4 years work, in all likely hood you won't be getting rich, even if the founders do.
Options Software (Score:1)
We offer a 30 day free demo of the software at http://www.fintools.com
If you are considering a job that grants options as part of your compensation, you would be wise to understand how to value the options!
Free option quotes are available from www.cboe.com which can be used with a freeware product QuoteTools also available at the FinTools website. There are many books about options available at Amazon.
Re: Wait a second... I can BUY my options? (Score:1)
Re:Shares (Score:2)
I know people who have worked for a variety of companies that have gotten options whose value have ranged from nothing (like mine) to several million dollars. It is all a gamble and valuing stock options is very hard to do. It is all speculation and depends on how good you think that company is from a total picture point of view. It takes strong management, sales, marketing, leadership and technical ability to really make it and be successful. All of those things are a hard thing to find and most startups don't have them. The next best thing is being with at startup that has one of the key factors and merges with another company that can leverage that key factor and has all of the other key factors.
In the end I believe that it is all luck and a little bit of strategy on your part. Remember that that first few people who worked for MS, Cisco, Sun, AOL and Oracle made the most money but most of the millionaires from the companies came after it was public (or at least beyond a startup stage) and just road their way to success. Maybe a good strategy is to work for a up and coming winner that has a good chance of making it but isn't a complete powerhouse yet.
This lowers you risk but has a better chance of reward. It tends to be more stable also. Startups are hard and I wouldn't recommend them to most people.
Options don't substitute for salary. (Score:2)
It varies depending on the deal - 6 months to 3 years. If they were offered in a private company and in lieu of salary, probably shorter. A larger company may grant a huge amount of stock options as an employment incentive (mine did) -- in which case the vesting period is much longer (the time you are allotted the options is the "grant" date, the time before you can "exercise", sell, them is the "vesting period").
Another thing to keep in mind is that you are often limited in how long you can hold onto them (in my case, I have to sell within 10 years of vesting).
2.What was the increase (or decrease) in value ?
The increase/decrease in value is dependent on the company's stock performance. If the company does not go public (not everyone gets to have an IPO), then things are rather more tenuous. A publicly traded stock is much more closely tied to specific financials of the company.
Stock options work this way: a company looks at the current trading value of their stock on the specified grant date and then purchases a certain dollar value or fixed number of shares of stock, which they set aside for you. The stock is held until the vesting period is over, at which time you may do one of two things: purchase the stock from your company at the price they paid on the grant date, or have the company sell the stock and give you the difference. Since you are never obligated to exercise your options (the options may expire with time, like 13 years in my case, but at that point they just evaporate), there's no risk that you will ever owe your company money if the shares never rise above the grant price.
In the case of my company, the number of shares granted was calculated by an outside financial firm by an equation based on my current salary, the Black-Sholes index of the company stock (a performance indicator), etc. Ultimately they come up with a number of shares that they expect to appreciate by a specific amount over three years based on past performance indicators.
3.Do you think it's a good idea ? Stock options can be avery good bonus/incentive plan in the same way other investments may be (think of stock options as a bonus that's invested in just one stock -- your company), but it doesn't replace salary since the benefit is deferred and, quite obviously, not at all guaranteed.
If the company is a start-up, and they have a successful IPO, and they look like they will be profitible for the medium term, options can be VERY valuable. However, 9 out of 10 startups will fail miserably (for all sorts of reasons), and the 1/10th that get through may struggle for some time to get a decent stock price.
Ultimately, only you can tell how mcuh you want to risk on such investments and what the vlue is to you, based on what you know of the circumstances.
4.What are the "gotchas" ?
The priciple gotchas are: a stock option may never be worth anything, and that options are an investment with fixed vesting and exercise periods -- so they are not liquid, you cannot borrow against them, you see no income from them whatsoever until the day you exercise them.
Your job will be to decide whether the option will produce more value for you than carefully investing the extra income the company was asking you to forgo in lieu of the options.
I still say options are better bonus/incentive plans than they are income replacements.
Stock Options (Score:2)
If you are at a startup (Like I am) you have a more complex problem. You have to evaluate several things:
1)How many shares am I offered.
2)How long will it take them to vest. (It is usualy over 4 years, with the first bunch after 1 year)
3)What is the option price.
4)What do I think they will be worth when the vest or at some point in the future.
For example I have a bunch of options in the company that I work for at $0.25 share. When we IPO I think that the stock will go to about $35 a share. So if it does that it gives me a large chunck of cash.
The other thing to know is that the earlier you join a company the greater the rist you are taking and the more options you should get. A friend of mine at the company was the 3rd person they hired and he has a *HELL* of a lot of shares. When we IPO he will probably be worth several million.
Oh also Semper Littenis Mandate (Always get it in writting).
Here's the #1 rule of options these days! (Score:2)
I know lots of people who were talked down as much as 25% in their salary for options in a company that went under after a year or two. Those options are worth nothing (of course), and those people get burned for the salary they lost.
Options should be a perk.
Also another good point thats already been said in here several times is to make sure EVERYTHING is in writing. With the sudden boom in the Internet over the last few years, there's a lot of serious sleezeballs out there.
Be careful (Score:2)
Several of these posts are from people who seem to have received options in a company that is already public - this is almost never a bad thing, because they usually have some value at the time of the grant, and they're on TOP of a salary, not instead of a salary.
Options can't really decrease in value - if you receive options on 1000 shares at $10, and the stock goes to $20, then you've made 1000x($20-$10)=$10,000. However, if the stock goes below $10, then your options are said to be "underwater" and they are worthless - you haven't lost money on the options, but you haven't made any, either.
As to how long you have to keep them, that's up to your company. I have received options from my (public) company as an incentive to stay with the company, and they vested (became exerciseable) after 3 years, and I had a 5 year window after that in which I could exercise them. My company's stock went from $13/share to $135/share, so I've done pretty well.
So, as another poster said, if you think there's a good chance that your company will be successful and go IPO or get bought, you could make a nice sum. If it doesn't, you'll have $0. I'd suggest asking for a salary you can live on, and see if you can get options on top of that.
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Re:My Experiences (Score:2)
In essence, options are a promise and incentive. If you make the company succeed, and it goes public, they become worth something. If the fellow offering them is having trouble meeting payroll... take em anyway! Chances are he doesn't have the money to pay you the big bucks anyway :-). It's when you're in the middle that you have to really sweat.
Use your brain. Apply common sense. (Score:2)
A typical company that offers options will have a four year vesting period. Vesting means your options become "usable", that is, you can use them to purchase stock at the price specified by your options agreement. Vesting schedules differ widely. I've been at companies where you vest 25% each year, I've been at places where you gradually increase your vesting over time, 10%, 20%, 30%, and 40%. I've also been at companies that did it the other way around (40, 20, 20, 20).
Can you see yourself committing 4 years of your life to this company? Does the company have a serious plan for how to make money? Do they have reasonable financial backing? Do they have good marketing and sales? Those are all questions that you should factor into your decision. Many options agreements have clauses that accelerate the vesting schedule should the company IPO, merge into a public company or get acquired. My current company has that.
Ask about cashless exercise of options too. That's when you give up a certain number of options in exchange for your stock. For example, let's say you have 100000 options at $0.10 each. Suppose you don't have $10000 around to exercise. Were you to do a cashless transaction, you take the IPO price, say $10.00, and convert ONE $0.10 option into 99 shares of stock. Note, you may have to claim the appreciated value of the options as income ($9.90 per option you gave up).
Even if you are NOT restricted under SEC Rule 144 with respect to sale of your stock, HOLD ONTO IT for at least 12 months. Why? If you dump your stock instantly, you get socked with short term capital gains tax on it. That's about 40%. Holding it for a year or more turns it into long term capital gains, at 22%. It's a no-brainer, unless you've got something that's guaranteed to offset the extra 18% you'll fork out in taxes to put your $$ into immediately (like say Qualcomm at the 11/98 price).
Be careful. If you hit the startup lottery, and win big, people around you WILL change. It did for me. My parents and grandparents are totally cool about it, they're just proud of me. My friends are happy for me and think it's cool. Other parts of the family aren't as good though. I've got extended family members that haven't spent more than 10 minutes talking to me over the past 10 years calling me asking about friends & family stock. People you went to college with will find out that you're suddenly a millionaire and start calling you about investing in something they are doing. People you don't even know will email you about getting money for things. I didn't even hit it huge (but I'll be quite comfy) and it's happening to me. I can't imagine what Taco, Hemos, ESR & those guys are getting hit with...
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If a company really wants you, ask for both ... (Score:2)
If a company really wants you, ask for both ...
I work for a small, semiconductor technology startup. When a company is working in the red, of course they are going to be tight. On the flip-side, they need good people. Like anyone else, they are willing to pay for it ... in both salary and stock options.
All I can advise you on is to look for these things before you join (that haven't already been mentioned above):
Find out how much money the have in the bank, and how long that will last
And that includes how long they expect to be in the red. No company in their right mind will have an IPO while they are in the red. So, until then, all you have from them is your salary. If they company has several million in the bank (usually secured through private or government investments), you are probably looking at a sound company with a future. And that means you'll get paid for the next few years before IPO.
A good indicator you are on shaky ground is the fact that they do not want to pay you even the lower-end market value for your employment. That means they are probably strapped for cash, not a good move. Although that could be because you are a commodity item. And it that is true, it may not be such a revolutionary startup.
Look for other unique assets the company may have, like a patent portfolio?
As with other Slashdot'ters, I think almost all software patents are quite lame and trival ideas. But many advanced hardware patents took years of research and dedication. As it is with my company. We have a large patent portfolio that makes us an inviting acquisition target should money become an issue (it has not yet, and probably won't). We have also proven our technology through government programs, which has in turn helped us raise funds and woo potential investors (we are now turning many away though).
It was not too long ago that most players in the semiconductor market stopped short of just laughing at our ideas and concepts. Today those same companies, and the Semiconductor Industry Association (SIA) itself, believes our approach is the correct one to solving the IC design problems of the 21st century. And those same companies are now admist organizing accelerated R&D programs to catch-up on the last 20 years we invented.
There are ways of implementing concepts similiar to our technology outside of our patents and current product focus. The ideas are nothing new (although we thought of most of them), and our patents and designs exploit what we believe is the best course (meaning we do not have lame, broad patents that stiffle innovation, in fact, we have been promoting it as the best course of future IC design). Of course companies like Motorola (and others, including some very prestigeous individuals I cannot mention at this time) have decided that our technology has already been proven and already developed to the point where it is commercially viable. But there will always be those who wish to "re-invent the wheel," hating us because we already dealt with the issues they are now having (e.g. Intel).
So, ask for what you want, but tell them you are flexible
If you and your skills are a valued commodity, they will pay. The salary may be slightly below market value, but they should more than make-up for it in stock options. And as one Slashdot'ter above mentioned, you need to know what percentage of the total "stockpile" is available to you.
But if they company has money in the bank to last a year or longer, long enough to its first product, ask for what you want and expect to get at least market value. I did with my company and walked into it with a nice raise. And since they did not meet the salary I wanted, they gave me additional stock options. I got the offer the very next day, that is how valuable they saw me.
One more thing: Non-Disclosure, Accepable; Non-Compete, UNAcceptable!
A company has the right to protect is technology, trade secrets and the like. As such, you will be presented with a Non-Disclosure Agreement. That is fine, sign it. But when the company wants you to sign a Non-Compete, give them two options for them to choose from:
You will get stares, disbelief and other "pep-talks" from others. But the fact of the matter is that "non-competes" ARE at least partially enforcable in many states IF you sign. As such, don't. If they won't reason, get a lawyer. He may not get rid of the non-compete, but he will narrow its focus so you can work after you leave the company.
As it was with my new company. I refused to sign the non-compete. My future boss, his boss, the head-hunter, and everyone else tried to reason with me. After a week, I got a lawyer, and we write a narrowed agreement. The next day, my future employer threw the Non-Compete completely out, they wanted me on-board ASAP. They said they would draft a new, narrower Non-Compete for everyone later on (or expand the Non-Disclosure). Unfortunately for them, no state law that I know of will enforce an agreement on you AFTER you have already started employment.
-- Bryan "TheBS" Smith
my experience.. (Score:2)
Link: The Tulip Bulb story (Score:2)
- Tulip Bulb Mania [jrnl.com]
This is not to say that this phenomenon is the exact thing that is happening with internet stocks -- but something of which everyone thinking of speculative trading should be aware. If you don't know about tulip bulb mania: read it.Stock Option worth nothing until... (Score:2)
I hope I don't come accross as bitter but I do want to show people the truth.
Re:Get the facts and apply common sense (Score:2)
The most important indicator is how many times the management team has take a company public in the past. More IPOs == higher chance of a big IPO again.
Don't take much of a pay cut, and get some vacation time accrued before you start. Make sure you take that vacation time and unwind; startups can be pretty vicious places to work (been there, done that, got the scars to prove it).
Good luck!
Re:Don't take options in leiu of salary. (Score:2)
In short: money is what you make of it, neither how much you make of it, or how much someone else thinks you're worth, within reason.
Give me happiness and a new mouse in preference to £10 any day.
Re: Wait a second... I can BUY my options? (Score:2)
Re:More to watch for... (Score:2)
1. They may choose not to tell you how many shares are outstanding. This is a minus, as you cannot make judgements about the value of your shares based on what YOU think the company is worth. None-the-less, you should be told a) the current estimated value per share b) the option price. These two numbers need to be handed to you IN WRITING, or you're being taken for a ride. The percent difference between these is called the "options discount". That is, you are being allowed to buy an item (stock) at a discount. You should expect between 50 and 99% discount. Any less is not much of a deal.
2. They should NOT have a clause in the options plan that allows them to just pull the shares back from you at any time. In reality, they always can, but it's a major pain in the ass. They should *not* be allowed to simply inform you that your options are no longer yours unless you are fired for cause, and even then, stock that you have purchased (e.g. the options have vested, and you paid the option price) should never revert to them.
3. You should either receive your full vesting or there should be a substantial acceleration in the plan in the event of a substantial change of ownership (e.g. you get bought out or go public). You don't want to join the company, have them go public and then not be able to sell your stock, as you watch its price plummet. The ways I've seen this done are: a) 1 year acceleration b) 1/2 of remaining options vest immediately c) the full plan vests immediately, but there is a restriction on when you can sell. Think about this aspect of the plan carefully.
Rule 0, however, is options are barely worth the paper that the contract is printed on (and in many cases less) unless your company succedes. You need to carefully look into the company and its plans.
Some nifty ideas to noodle around with: If you don't have a brokerage account, get one now, don't wait until the last minute. Talk to friends about what their plans are like. See if anyone in the office is willing to discuss the plan (most companies don't like this, but that's their problem).
Don't take options in leiu of salary. (Score:2)
I would demand what you are worth, and if they want to give you options on top of that so be it.
I personally would only accept options as a substitute of salary on three conditions. First I would have to really believe the idea was a briliant one with a good business plan. Secondly I'd have to really think highly of the management team of the company. Third I'd have to be in a position where I made a difference in the company and helped make desicions on the way it's run. (forth, goes without saying, it better be a truckload of options)
Lets face it, in this late stage of the game most all of the good management teams have already gone out and done most of the briliant ideas and taken them public. All thats left are the stragglers to pick up the scraps. Most only areas left for internet startups are highly specialized/marginalized fields where the returns aren't that great, or areas where there is already a giant dominating the market.
Options are a great way for startups to underpay their tallent and 'handcuff' them so that they won't leave when they'd rather be somewhere else. I know two people who were handcuffed and rather be somewhere else. One of them recently was fired (he was misserable for a year and still lost his options).
My opinion is to get paid more and invest the extra in the stock market or put it away for a rainy day. Either way _you_ controll your destiny, not some idiot MBA who wanted to do 'this internet startup thing' and needs your help just to open his email.
If your not following the rules layed out above buying lottery tickets might be a better way to go (about the same risk!)
Last suggestion: be an independent contractor.I get to work at a couple of new startups a year, make more than any human should, and get to do the fun stuff of building up their business without the boring side of having to sit around maintaining it for the following years.
Re:Don't take options in leiu of salary. (Score:2)
One other dirty trick to look out for... (Score:2)
(Got burned pretty bad on that, left my last company, went to cash out the options I had vested (Would have made for a down payment on a house or a new car) and turns out the turkeys never registered them! By the time they were finally registered, the company had finished bright sizing, and was worthless!)
Be careful. Talk to a lawyer and an accountant about this kind of stuff, there are SOOOO many ways to get burned, and only a few ways to get paid this way.
Re:Get the facts and apply common sense (Score:2)
On acceleration, this is also atypical for all but the most senior employees, and even then not a given. Acceleration causes trouble in the event of an acquisition if it's not properly structured. This is because of the technical details of how an acquisition happens. If there is a change in the equity positions in the company shortly prior to an acquisition, it makes it hard to account for the acquisition as a Pooling Of Interests, which makes it less attractive to the buyer. It means that any "goodwill" in the acquisition price (that is, the difference between the book value of the acquired company and the price paid for it) shows up on the expense side of the acquirer's balance sheet. Ever heard those "Earnings were $x or $x+nnot including a one time charge associated with the acquisition of company Y" things? That's goodwill showing up on the wrong side of the balance sheet. Companies typically don't care about individual engineers enough to grant them acceleration, and even if they do, it might have to be waived if the company negotiates an acquisition.
IANAL, nor an accountant, but IAA entrepreneur.
Also .... (Score:2)
More information on stock options (Score:2)
It's obviously written by someone who has "been there".
My experience is limited but... (Score:2)
I don't know the situation, but all the share options I have come into contact with are companies that are just after first round funding. Hence, I would keep them until either the IPO or the company is bought by a bigger fish.
2) What was the increase (or decrease) in value ?
To ZERO, or 1000 percent increase seems to be the range
3) Do you think it's a good idea ?
As long as you aren't actually taking a pay cut of any major proportion. Depending on the company it may be easier to simply take the difference in salary to Vegas.
4) What are the "gotchas" ?
It's partially a game of luck. Of course, in this game, if you are driven enough, and good enough, you can actually make it more likely that the value will increase.
Make sure you get some sort of shareholders agreement. It is probably possible for the company in question to devalue your options significantly by simple act of board meeting. It's unlikely as they would loose all staff overnight, but it is something to think about.
Personally, I wouldn't take a pay cut, but I would consider this a major incentive to joining a company. Shares are currently the easiest way to large sums of money (if you are lucky)
Percentage, not number. (Score:2)
I'd like to emphasize a point that's not getting much attention:
Don't focus on the number of shares: it's the percentage of the company you own that will determine what you make on options.
I have two friends - both received 1000 shares in a pre-IPO startup. When IPO-time arrived, both companies felt the need to adjust their stock value - they like the initial offering to be in the $10-$20 range.
Friend A's company made a 2-1 split, and he came out with 2000 shares.
Friend B's company made a 1-10 split, and he came out with 100 shares.
MORAL - before IPO, the number of shares is almost meaningless. The percentage is key.
-k
simple calculation: worth very little (Score:2)
But, assuming that you are asking about the opportunities that most people are presented with, here's a thought exercise:
- If you get options for 1% of a company an amount generally offered only to the 1st couple of engineers after the founders
- and it goes public valued at $100 million and very few companies achieve that valuation
- by that time your shares will likely have been diluted let's use 50% as the company must sell more shares to raise money for growth
- and it will have taken 4 years
- so you now have a $125K a year bonus break out the champagne, but not too expensive
Now, that's nothing to sneeze at, it's a nice bonus. But, you probably weren't paying attention to the probabilities: this was the unlikely, lucky scenario.It's worse than that: Chances are, however, that if the company is succeeding it will show up on the radar of a big company and will get bought out in the $10-$20 million range after a couple of years and you will get maybe $200K but you'll have to wait around through your vesting period of 4 or 5 years to receive it. In these scenarios, the founders will be doing 10x better than you at $2-$10 million and post-acquisition or -IPO their salaries will be fat which is why they will cut the deals without asking what you think. They will be thinking, "we are offered $20 million to give up. Otherwise, that $20 million and more will be used in a marketing campaign to defeat us. We do not have $20 million in cash to fight back... hmmm."
Remember, these are the rosy scenarios! I'm not even talking about the 90% ugly ones.
But the reality is much better than this! Take the damn deal! It will be fun, and the real rewards come from doing a good job and getting promoted. If the company goes to $100 million and you are among the first 10 employees? By that time you will be managing a huge group of people who are really getting nothing :) pumping up your resume with real experience and visibility, and getting the opportunity to jump ship in a few years and be a founder which is where the action is. All this presuming you are talented in a variety of areas. If you are not, take the deal anyway, because you are not talented and who is going to give you a better deal?
So, just to sum up (didn't I just sum up? :), if you are in a startup situation, get as much info as you can. Run the numbers up above by the people making you the offer. Don't be afraid to ask any questions you want. The tougher your questions, the more they'll think "this one's got 'nads! We want'em on our side!" Ask about the ownership of the founders and the investors. Ask what happens in case of an acquisition. Ask for the "right to be taken along", meaning, they sell their shares, you can sell yours. Ask for [can't remember the term: immediate vesting on IPO or acquisition] so they'll have to offer you a good job to stay. When you ask what percentage you are being offered, ask if it's fully diluted (taking into account special options that the investors have to execute their liquidation preferences). Ask for more shares! (they're worthless, remember? :) From the point of view of the founders, your options are actually very expensive: each sliver of .25% equals an employee, there's only room for a few 10's or so, and they are going to need many more employees. In the course of asking the tough questions, you will discover whether the founders think of you as a junior partner, or a mushroom. (The mushroom theory of management: keep 'em in the dark and feed 'em shit.)
Also pay attention to the quality of the shares. Look at investor confidence: a company that has tried to raise money and failed and wants to pay you shares instead of salary? Nope. A company that has the confidence to pay you a real salary is also offering you shares that are real.
But really pay attention to the rest of the offer. It's the job, the people, the day to day that is going to launch your career to the next level. If you approach the options as gravy on top of a good job, you can have a lot of fun with them, as if they gave you a giant book of lottery tickets on top of a real job with a real salary.
Make hay while the sun shines! (Score:2)
Many of my friends have reaped a moolah thr' stocks:
there is this friend of mine who got 200 shares @ Rs 10 each in an indian firm [inf.com] some 4 years back. then they split to 800, and when the company got listed on NASDAQ a few months back, the price was Rs 14000 each.... at 28, he is planning to retire...
The Options Lottery (Score:2)
I've gotten options from 3 previous employers, and you know what? I'm still working for a living. :-)
In one case, the company went public but the share price dropped below the IPO price, which is not really that uncommon (at the time, they told us that happens with 8 out 10 IPOs). It's trading well above now, years later and years after I left. I would have only seen anything from that if I had forked over my own money when I left. On one spike I made enough to pay for a vacation.
In the second case, it was public when I started, but possibly entering a boom, but it didn't work out. The stock price dropped so the options were worthless, and again I left.
In the third case, the company is at least a couple years behind on their plan to IPO, and I got sick of working there before any of my options vested. So again, nada.
A bunch of people have made some excellent points, but the keys for me have been:
My advice is unless you want the startup for other reasons, consider the options as icing; a bonus you may never see. Make sure you can live with your salary.
Re:First understand what stock option grants are.. (Score:2)
Um, ever hear of a privately owned company? Not every company in existence is publicly traded, or heading in that direction.
You mentioned that the company is offering a trade of salary for options. Take the options!!
Take the options in lieu of salary? NO!!! If a company wants to offer me options, that's nice. It had better not be at a reduction in salary, though. Stock options are an added incentive. Stock options are a temptation. Stock options are NOT a replacement for getting paid.
If they offer a decent salary and throw in options as a sweetener, then take it if you like the job. If they offer stock options and a reduced salary, tell the cheap bastards to push off.
How I got burned by options (Score:2)
I checked on how many options I had vested and found that I had about 600 valued at $28 and about 400 valued at $22 (the differences in value being due to when they were issued & the merger). The only problem was that Network Associates revalued the stock at $16 per share. All of a sudden, my options were worth less than the trading price. Not too long after the stock crashed, I was "rightsized". I had 90 days to exercise my options from the date I left the company. Unfortunately the stock price never went over my strike price during those 90 days.
The moral of this is that even if your options are gravy, don't rely on them. If I had taken out a loan for any kind of large purchace figuring that I could pay it back based on my options I would be in big trouble now.
I work at Ask Jeeves and the AMT sucks. (Score:3)
How do I have to keep them?
The important issue here is longterm capital gains. Taxes. They suck. When you first get hired, you will be given a piece of paper from the board that says how many shares you have and how much the strike price is (strike price: the amount you may purchase shares for). This paper is called you option grant. There is an important date on here (surprisingly enough, called the grant date) which is the date that you officially begin vesting. But this date also have important tax implications. You only get long term capital gains tax rates (20%) if you hold your stock (not the option) for two years after the grant date and one year after the excercise date (the day that you purchased stock from your options). These periods overlap. If you sell your stock either less than two years from your grant date or less than one year from your excercise date, then you have what is called a disqualifying disposition. Basically, the money you get from your stock sale will be treated like normal income.
What is the increase in value?
This is my fourth startup company. Although one of my previous companies went public (on the EASDAQ, though so obviously that doesn't count) and another one was bought out, I never saw a dime from them. However with Ask Jeeves (Nasdaq: ASKJ), I finally hit it. ASKJ closed on friday at 103, and if the stock held that value for me to fully vest, I would have made 15000*(103-1.50) or $1.5225M. However, since my vesting schedule spead over 4 years, presently, I only actually have $380,625 of that.
Our stock has been very volatile lately (mostly with the lockup coming -- I'll explain that later). We have been all the way up to $190. On our first day of tradingwe shot up to $70, then over a few months sank to $30. Then to $190, now back to $100. Our chart ( http://www2.marketwatch.com/intchart/default.asp?
Lockup Expiration is another thing. When a company goes public. All the pre-IPO shares cannot be traded (this mean employess, board members, investment banks, etc...). You have to wait, usually, 6 months to do anything with them. Our six month expiration was up in December. However employees still counldn't sell. There are also blackout periods where employees cannot sell. Blackout periods start before earnings are announced and continue until the SEC mandates 3 days after the earnins report is released (this is true of all nonpublic information -- you cannot trade on nonpublic information, and if you do know nonpublic information you must wait until 3 days after that information is made public).
The moral of the story is that you have to hold on to you stock until the SEC says that you can trade it.
Do I think that it is a good idea?
I like small companies. There are many on the IPO track. It is more coincidental than intentional that I work at places that give stock options. Many companies give a form of stock options (all of what I am saying here has to do with qualified stock options, most larger companies give nonqualified stock options, which are slightly different). I might, personally, find it better to get a larger salary with a job that I really liked than to get a heap of options and a job that I just don't despise.
What are the gotchas?
1. AMT. Remember those three latters. If your comapny is successful, you will hate those letters. In the US there are 2 Federal tax systems. The standard income tax that you are used to and then the Alternative Minimum Tax (AMT). AMT is much simplier to calculate. It is basically (close to but not exactly) your income tax, but no deductions. Then you take one huge deductions at the end of adding everything else up. That personal deduction is usually so big that you never have to pay AMT. You will have to calculate your AMT when you excercise your options (turn them into real stock). Your tax basis of your options in your strike price (tax basis: what is the base amount you use to calculate your tax costs). When you excercise the options, your tax basis will be raises to the current value of the stock (if I excercised today, my tax basis for my options would go from $1.50 to $103 and if I did this to 5000 shares, I would be liable to pay AMT on $507k). You have to pay AMT on this spread (spread: the difference of your strike price and the fair market value of the stock). The only good things that comse out of AMT is that when you sell your shares, you will calculate the taxes next time against your excercise price instead of your strike price. And the other good thing is that AMT is just a matter of time: ever year after paying AMT, is you do not pay AMT, you can get a deduction in the amount of the difference your AMT and your normal income tax. Basically, in the years you are not liable for AMT your taxes will be greatly reduced. So you really only loose the opportunity cost of the AMT amount (which can still be huge).
2. Don't watch the wiggles. Watching the stock price hurts. I have no doubt that ASKJ will rise in the future but seeing it tank like this is painful.
3. The value of the stock is in how valuable the company is. Make smart decisions on who you work for. No matter how much you may not like the idea of uppper management, make sure your upper management is good. No, not good, amazing. Make sure they understand how to keep a company happy and productive. They are many people out there that understand the technical apsects to company finance, but if the workers are not happy, the company will go nowhere.
Financial Engineering 101 (Score:3)
The short of it is that options can be viewed along a spectrum ranging from a benign form of aligning employee interests with the owners (making money) through long-term organic growth, to a bribe to accelerate work effort (those 80 hour weeks) in order to ambush an unsuspecting target. Is it worth the pain/risk? In one sense, it comes back to the individual in evaluating what type of career and lifestyle they want, whether they are willing to sacrifice the present for the future. The monetary gains can be quite high from creating products/services that others think they want but ultimately it comes down to individual values (for example, a study indicated that people valued a happy marriage and family as being worth $150K/year). In pricing options, you have to be realistic in understanding your job and the business the company is in as to the long-term prospects. Remember that public shares are capitalised expectations and growth of future profits so unless you're in a sustainable business, things could get sticky when the growth slows (despite the wild expectations of some businesses, biologists call unlimited growth cancers).
Successful (note not necessarily equivalent to good or moral) businesses have a decent model (e.g. Microsoft = controlling a platform to flog their building blocks) and anyone relying on accounting tricks (like the pooling of interests to hide deprecation of goodwill) or using overinflated script as currency to eliminate competitors is in the brand-name stripping business and not IT (ie guess who gets made redundent when a merger is announced, the programmer or the manager?). If the company provides you with its financial record, then you can probably made a guess as to the future and likely profitability to see whether your efforts (and thus options) are fairly rewarded and whether you can trust the managers to achieve their role (creating a need for the product/service). One good trick is to ask yourself, if you are a bank manager, would you lend money for this business? Some basic financial literacy goes a long way to avoid being ripped off.
Best of luck in your wealth creation efforts.
LL
Re:my experience.. (Score:3)
I have been with a company for 3 years.the way they work (at least here) is you have the "option" to buy x number of shares each six months at whatever the current price is.
This is not a stock option plan, it's an employee stock purchase plan (and not a very good one.) At the place I work, we have both. Out ESPP works pretty much how you describe it, except that we get to buy the stock at 85% of the lower market price at either the beginning or the end of the 6 month period. Another words, let's say the 6 month window begins on July 1st, at which time the stock is at $10. We have an elected amount of money deducted from our paycheck each pay period and this money gets put into an escrow account. On December 31st, the stock closes at $26 per share. Well, at that point, we get to buy the stock at $8.50, effectively making $17.50 per share profit if we turn around and sell it immediately. Conversely, if the stock took a dive, and closed on December 31st at only $5, then we'd get to buy it at $4.25, which is 85% of the lower price.
On the other hand, we also stock options, which were granted to us when we joined the company, and the price of these options is set based on the closing price the day the options were granted. From that point on, the option price remains the same, no matter what happens to the stock, thus if the company does well and the stock goes through the roof, you can make a killing, but if the company does poorly, then the options are worthless. There is also the issue of vesting in these options. Our vesting period is rather long (5 years) but it vests 4 times a year, so each quarter I become vested in 1/20 of my grant, so if I wanted to, I can exercise that portion.
If the company is doing well, this amounts to a shiny pair of golden handcuffs, because if your options are suddenly worth, say, $100,000 net profit, it's much harder to walk away from that, if you're not fully vested. A good way for company to keep people around.
Stock options at the major corporation. (Score:3)
In our case, we were given a 1200 shares with a strike price of $26. A third of these vested each year. First year, their after-tax value was around $7,000 at the time of vesting. Second year, the next set of options had an after-tax value of $12,000. The market was not kind to the stock this year, and has effectively stalled at around $13k but fluctuates WILDLY. (No longer an INVESTMENT stock... the stock is now a TRADING stock.)
Be aware that taxes eat a significant chunk of the value, unless you hold for over a year. Cashing in during the first year will cost you around 43% of the amount in taxes.
I *did* make the mistake, discussed earlier, about confusing options as compensation instead of incentive. So did just about everyone else I know. I'm being paid $20k below an easily obtainable market value. But there is an advantage of having options instead of a salary... bulk payment. Having an extra $1k/month is great. But being hit by $12k at once is a WHOLE LOT BETTER. You can do something useful with all the money at once.
What are some useful things to do with your stock options?
If you have credit card debt, and you don't think your stock is going to gain at a rate equal to what you're paying on your credit card, PAY OFF THE CREDIT CARDS. You're paying out more than you're gaining, otherwise.
If you've got a stock that you think is going to go up like a rocket (or you are forced to excersize your options earlier than you want to), investigate a MARGIN LOAN. I have options with Solomon Smith Barney. I called the line I use to excersize my options. I hit the option for a real person. I asked to speak to a financial advisor. Basically, you are using the value of your options as a guarantee to buy more stocks with. (There are risks. Talk to an advisor and completely understand the transaction.) The other net plus is you get a real trading account.
Of course, there's always the obvious options of starting your own company, or just spending left and right on cool stuff. Can I recommend arcade games? Ones by Atari, perhaps?
The downside to all of this is that there is no guarantee. You are gambling that the value will go up. (Actually, at one point, people who would have excercised their options would have had to PAY money!) The other is that you'll still be working for the company. Also, you're gambling that there isn't a significant change at the company.
What kind of significant change? Well, EDS is taking over our IT shop at the end of the month. We have to excersize our options before February, or we lose them. And, we're getting SCREWED out of our future unvested options (easily worth post-tax $40k, and certainly more in the future). They've put in writing the effective language of "you WILL join EDS and lose your options or you are fired and lose your options and don't get any severance benefits". My (pre-EDS) employeer is going to get what they're asking for... a nice class action suit slapped on them.
EDS actually wants to keep a good chunk of us and they realize we're getting screwed. (IE: "If I don't get my stock options, you don't get me!") They claim to be working a (nebulous) "performance share" deal. The question now is if it'll be worth $500/year, or $50,000/year.
Sometimes, I wish I didn't have to worry about options. They really add a lot of stress and unhappiness to what should be something pretty simple. But then, if it weren't for options, we wouldn't be paid well.
Back to the original topic, take the job with options or a higher paying one without? It is just like investing. Determine your tolerance for risk, and go from there. If you take the options, then take the time to understand the stock and the way it behaves. What sort of things it reacts to, and what other stocks it reacts with. See if it is a trading stock (goes up and down in a range) or an investing stock (nice upward and somewhat consistant line). Options in a trading stock are almost worth nothing.
Good luck!
Please visit these resources... (Score:3)
Re:Do what you like best. (Score:3)
Yes. Yes, yes, YES!!! To my way of thinking, having a job that I enjoy going to every day is (ok, almost) as good as being independently wealthy and doing what I want. Sure, it's cliché, but there's a profound truth in that old saw that money can't buy you happiness.
If you want to be a developer, go write code. If you want to make a fortune, persue your career with that goal in mind. Either way, I would be very careful of getting caught up in the IPO lotto. As others have observed, there's lots of risks:
- A company that hasn't gone public might never; their options might never be worth anything...
- Even if the company does go public, the stock market is a notoriously unpredictable beast; there's no telling what your shares might end up worth
- Even if the company goes public and your options are worth a lot of money, you will have to work through a long vesting period before you really own them. And 5 years can be a long time to hate your job.
There's got to be lots of companies out there saying "thars gold in them thar internet IPOs", and most of them have got to be more cluefull than LinuxOne. Do you really want to spend a long period of time working for a company with the primary goals of 1) Going through a successful IPO, 2) Making sure the stock price stays as high as possible, and 3) Very little else?Options: Incentive, not Compensation (Score:3)
I don't recommend this. I did it in my first startup and ended up a bit out in the cold - especially when the company failed. I do have about 40K shares worth of wallpaper though.
In the second job in which shares were offered, I negotiated a good salary with a decent amount of shares on top of that. I think of options as being worth $0 - they are not compensation for anything, they are incentive for me to stay through the vesting period.
I'm now in my third startup with options and I took the same approach this time - options are just icing on the cake if we build a successful business.
I know most people in this industry are more interested in the work than the money, but you have to be smart about the money too.
1.How long did you have to keep them ?
In all of my situations it's been a four year vesting period. The vesting increments over the course of those four years. It's not uncommon that they would vest 1/48th per month over that period. Sometimes you'll find a "one year cliff" in which nothing vests for the first year but at one year you magically vest 1/4 of your options and then 1/48th of the total options per month after that. I heard of one place that vested 1/4 per year rather than incrementally per month.
Also, be aware that if your company completes an IPO you will probably be subject to a lockout period of from 6 months to a year. The guys at VA Linux weren't able to get in on those high prices initially - they are still holding theirs.
It depends on your agreement, but there is often a clause stating that the options vest immediately in the case of the company being acquired.
2.What was the increase (or decrease) in value ?
First Time: $0
Second Time: ~$4 per share
Third Time: Still waiting on that one
3.Do you think it's a good idea ?
Of course, but I've been through about 4 companies in the last six years, so I don't know if I'd listen to me if I were you.
4.What are the "gotchas" ?
Taxes. Spend a lot of time at the Motley Fool messages boards dealing with employer granted stock options and take a look at this www.fairmark.com [fairmark.com] site. There is a lot of information here.
There are different types of options, so be aware that different laws apply differently to them.
Stress. As a shareholder, you get to be stressed when the company is on the ropes. Of course, there's the flipside. However, have you looked at the success rate figures for startups?
Good luck.
Troy Denkinger
Do what you like best. (Score:4)
You get an offer to work for a startup doing some "new" think with Linux. They're only going to offer you $40k, but they'll give you 10k in stock options, and tell you to look at the Red Hat IPO for an estimate of what those 10k options will be worth in 3 years (when you're fully vested and can sell them). Wow, you think, I could be worth over a million bucks in 3 years...of course your employer knows this and expects you to work 60-80 hrs/week to acheive this.
You get a second offer for $50k, but no stock options. Nice place, and you'd love to work there because you know it's laid back and isn't as cutthrought, only 40 hrs/week, but those stock options are on your mind.
So you take the first offer, lookin for the big payout. Your company goes public after 2 1/2 years (before you're vested), and doesn't do too hot, after 6 months (when you can sell) the stock is only at $4. Hmm...who got the better deal?
Deal 1: ($40k/yr * 3yrs) + (10k options * $4/share) = $160,000
Deal 2: $50k/yr * 3yrs = $150,000
Whoa, even at only $4 per share, you made the right choice! But wait, not really. Think of all the time you put in that you could have been doing other things with that other "lesser" offer in deal 2. You'd save yourself 20 hrs a week on average to spend w/ your family and friends. Also, you have to remember the time/value of money. $10k now is worth more than an extra $10k in 3 years if invested correctly.
Moral of the story? Do what's best for you, and don't base your decision on pipe dreams that could ruin your life.
Get the facts and apply common sense (Score:5)
So what you need to do is answer some questions the best you can:
- Is the product going to be useful to someone? A product that is interesting to you as an engineer might be of no interest to a potential customer (or web surfer).
- How is the company going to make money? Read the business plan. Does it make sense to you?
- When do the first suits show up? You do, unfortunately, need some of them for your company to succeed. There are exceptions, but this is rare. Personally, I have found it difficult to interview sales and marketing guys and figure out if they're any good. In hindsight, however, the bad ones broadcast warning signs. (E.g. a sales VP who came out early in the life of the company and said he had no idea who he would be selling to. But he said it in that confident and smooth sales VP way and yes, he snowed me.)
You should definitely talk to as many people as you can within the company to decide whether you think they're going to succeed. DO NOT interview with just the techies. Insist on meeting the suits and reading the business plan.Other things to watch out for:
More to watch for... (Score:5)
Get the share price on paper. Get the company to justify that price.
Ask around what a standard grant is at the company in question. I was told when I joined the company I currently work for that when I joined (6 months before IPO) that my shares would most likely be around $8. After joining the company, those same shares (1000) were granted to me at a whopping $18.90 -- a much different than my expectations. Later, the company went public at $11/share. Effectively making my options worth nothing until the stock price climbed to above my grant price.
Know the math.
I know this sounds stupid, but work the price out on paper. A standard approach by employers is the Here is a $30,000 in stock options that could make you a millionaire. That same $30,000 might actually be signifigantly less under normal circumstances. A grant of $5/share * 1000 shares = $5000 that you have to put up front to get the stocks you are vested in. The company may believe that they can warrant a $30/share price (which is reasonable), hence the $30,000 estimate. The real world is a little more complicated: The real price in the above example is $30,000 - $5,000 = $25,000. Granted, in this example, that is a nice investment. If you only plan on staying with that company for two years (assuming 4 year vesting period) and will only get vested in 50% of those stocks.
Have realistic expectations. Red Hat and VA Linux are exceptions to the rule.
Although we have all been amazed (or maybe not very surprised) by the spectacular success recently of Red Hat and VA, these companies are most definately exceptions to the rule. While the tech industry was surprised when the IPO's of these companies were as successful as they were, the investment community was dumbfounded. Most companies IPO somewhere between $10-$20 a share and generally open around that price or slightly above before settling near the IPO price. That is because CFO's and investment bankers aren't dumb and will have a good feeling for what the company can support for a stock price.
There is no garentee with stock options.
As stated previously, it is a great gamble and can pay off immensely but it is not money in the bank. Keep your whits when examing a company based on possible stock options. One company offerred me 10,000 shares @ ~.30 share while another offerred me 1000 @ ~$18 and I took the $18 for several reasons. First, while the first company's offer was certainly better given just those figures, you have to look at the time frame involved. Company A wanted to go public eventually but it would not likely happen for at least 5 years. Company B was on the verge of an IPO (it happened 6 months later) and was much more of a sure thing. Five years versus 6 months was a great selling point. Also, be aware that most companies will never go public! Either they will go under or will never have the earnings or size to support itself in public trading.
Know your taxes and the tax laws of your state and federal goverment.
Be acutely aware of short term versus long term capitol gains. Consult a CPA if you are really unsure of the financial implications of stocks. Believe me, there are many. Short term capitol gains will impact the bottom dollar quite a bit. In the above example I gave, the above $25,000 ($30,000 in market price minus $5,000 to buy the options) you would actually receive around $15,000 (this will vary depending on your state) if you sold in the first year. That same $25,000 will be worth $20,000 if you wait more than one year after buying your vested options before selling them. Believe me, it gets worse. People make careers out of fiddling with these numbers.
I hope some of this helps. Be aware, I am a developer not a CPA or business person or upper management so take everything above and research your own answers and apply it to your situation.
Caveat Employee (Score:5)
I'd say that the first thing to be wary of are vesting rules. It is a sensible and ubiquitous precaution for a company to keep you there; you are the value of the company, more than its so-called assets.
But it is therefore easy to get stuck at a bad company. You don't know how much the company will be worth when/if it is successful. You need to know what proportion of total shares is represented by your share (I know one company which basically offered n shares, but said, "You'll just have to hope we don't issue too many shares and dilute you out of the game. Trust us."
You'll want to get a good idea of the management team, talk to other coders there, etc. You should do this anyway, but if salaray was all you got, you could just jump to somewhere better. Vesting rules means that much of your pay depends on you staying 2-4 years-- that could be half your working life due to age discrimination. That means saving 10% of your income for your retirement, too.
It is, philosophically, great that you don't care too much about money. But for Pete's sake don't tell them that. Otherwise they will lure you with 'intangibles' which will vanish by week two. I know people who are hideously underpaid for their skills, but get seduced by sweet talk from managers who are taking 10x the salary. Take 80k instead of 50k and donate it to charity-- you'll be doing a good deed and management will regard you as an $80k asset. This isn't about being a 'nice guy', it is about not being a naive businessman. To them, your worth is what they are paying for you.
Remember age discrimination. There'll be some great young 22 year old who can work 16 hour days and is up on everything new, and doesn't have a family to support in ten years. So count on a short working life before you have to settle somewhere where your bargaining position isn't so good.
Look at who is investing. Joe McClueless might be big in the machine tools field, but to him your venture is just a way to put a little risk in his portfolio. If Larry Ellison is dropping $10M, though, you know that your company has been judged as a good investment by experts. Don't look at who they're 'talking to'. Anyone can talk to anyone else. The measure of a company is ink on paper, and numbers not happy words.
Finally, and this actually should have come first, make sure this is something you believe in as a field. Don't do databases because they are hot. If your passion is UNIX, do that. If it is COBOL, do that (!). If it is graphics and usability, do that. You'll be happier and much more successful doing work you love and believe in. Just remember: you are also a businessman. Act naive, and management will fleece you. If you don't believe in money, take it anyway, then give it to charity.
Recent Infoworld article (Score:5)