Stock Options?

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DIFAR31
Posts: 304
Joined: Mon Jan 01, 2018 5:51 pm

Stock Options?

Post by DIFAR31 » Wed May 15, 2019 1:47 pm

A young person I know, one year out of college, has been offered a job at a relatively new company with two salary options:

1. $50k salary with 3,000 stock options (at $1 each, in the person's name) with a vesting period of 4 years. The company is private now, but obviously planning on going public at some point.

2. $55k salary, no stock options.

I have been asked for advice, but I know nothing about stock options. What's important here? What are the right questions to ask of the prospective employer?

hansatsu
Posts: 6
Joined: Wed May 01, 2019 2:41 pm

Re: Stock Options?

Post by hansatsu » Wed May 15, 2019 1:58 pm

Especially as a lower-level employee in that kind of high-risk lower-reward scenario, cash is king. From a pure financial point of view, would recommend negotiating to a higher salary.

However, there is usually a bit of a mind game that could be in play here, where startup employer wants to test the new hire to see if they "believe" in the future of the company and drink the kool-aid. If they decline the equity, could send a signal they are a non-team player.

Jack FFR1846
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Joined: Tue Dec 31, 2013 7:05 am

Re: Stock Options?

Post by Jack FFR1846 » Wed May 15, 2019 2:03 pm

I've been offered this kind of choice many times.....although with far more equity offered. I have always chosen the higher salary, always. I have never been sorry and at times have had pity on my gambler co-workers who went for the options and remained forever under water.
Bogle: Smart Beta is stupid

HEDGEFUNDIE
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Re: Stock Options?

Post by HEDGEFUNDIE » Wed May 15, 2019 2:05 pm

Teach him/her a first lesson in negotiation.

Get the startup to pay $60k + options

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Stock Options?

Post by MotoTrojan » Wed May 15, 2019 2:08 pm

You have not provided enough information to really make a decision.

Are these ISOs or NQOs?

What is the current valuation of the company?

Generally your strike price (sounds like $1 here) is based on the company's valuation at grant date, so basically you have the right to pay $1 to get $1 of stock. That isn't very exciting since you make nothing. Now if the company is worth $100K and grows to be worth $100M, you have the right to pay $1 to get $1000 of stock... pretty exciting!

So you have to make a trade-off on how much bigger the company can get, and what the odds of that are. Options have a lot of perks for growing/small companies, but hopefully you can see why it isn't great for larger companies.

For example, a stock option at Amazon today would give you the right to pay ~$1870 to get one share of Amazon, so it is worthless today, where-as if they just outright gave you one share you'd have made $1870 even if you sold on day one.

MotoTrojan
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Re: Stock Options?

Post by MotoTrojan » Wed May 15, 2019 2:09 pm

HEDGEFUNDIE wrote:
Wed May 15, 2019 2:05 pm
Teach him/her a first lesson in negotiation.

Get the startup to pay $60k + options
Agreed. I really regret not negotiating my first job, and not negotiating harder on my second (got 16% more salary but should've pushed for more options too).

bluebolt
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Re: Stock Options?

Post by bluebolt » Wed May 15, 2019 2:14 pm

Also, how many shares are outstanding? I assume at 3000 options being offered to an entry level employee that's probably 0.01% or less of the overall equity. Some companies are notoriously stingy about giving out that info, but you could use it to model the value of the options at various valuations.

Agree with Hedgefundie, they should try to negotiate. One tactic I've used in the past given this scenario is something along the lines of "For $55K and the options, I'll commit right now/today." Probably doesn't have much leverage given the comp, but a hiring manager would likely appreciate the fact that they tried to negotiate, even if they don't get what they asked for.

MittensMoney
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Joined: Mon Dec 07, 2015 10:59 pm

Re: Stock Options?

Post by MittensMoney » Wed May 15, 2019 2:20 pm

MotoTrojan wrote:
Wed May 15, 2019 2:09 pm
HEDGEFUNDIE wrote:
Wed May 15, 2019 2:05 pm
Teach him/her a first lesson in negotiation.

Get the startup to pay $60k + options
Agreed. I really regret not negotiating my first job, and not negotiating harder on my second (got 16% more salary but should've pushed for more options too).
New grad negotiating for 20% higher salary on top of the options offered at a new start-up? 99% sure the hiring manager will tell them that the offer is the offer, take it or leave it.

mikesteg
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Joined: Fri Feb 15, 2019 12:56 pm

Re: Stock Options?

Post by mikesteg » Wed May 15, 2019 2:38 pm

Agreed, negotiating probably won't work for cash, at least not without a written offer from someone else. I would ask for 10k options under the same terms. Demonstrate that he is 'buying in' and not going to jump ship in a year (though he may anyway). This is with the full understanding that it's just paper unless the company does well and goes public, and then does well some more. Worth a bit of a gamble unless he's got $100k in college debt or a kid on the way.

HEDGEFUNDIE
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Joined: Sun Oct 22, 2017 2:06 pm

Re: Stock Options?

Post by HEDGEFUNDIE » Wed May 15, 2019 2:40 pm

MittensMoney wrote:
Wed May 15, 2019 2:20 pm
MotoTrojan wrote:
Wed May 15, 2019 2:09 pm
HEDGEFUNDIE wrote:
Wed May 15, 2019 2:05 pm
Teach him/her a first lesson in negotiation.

Get the startup to pay $60k + options
Agreed. I really regret not negotiating my first job, and not negotiating harder on my second (got 16% more salary but should've pushed for more options too).
New grad negotiating for 20% higher salary on top of the options offered at a new start-up? 99% sure the hiring manager will tell them that the offer is the offer, take it or leave it.
You won’t know until you try.

bluebolt
Posts: 782
Joined: Sat Jan 14, 2017 9:01 am

Re: Stock Options?

Post by bluebolt » Wed May 15, 2019 2:58 pm

HEDGEFUNDIE wrote:
Wed May 15, 2019 2:40 pm
MittensMoney wrote:
Wed May 15, 2019 2:20 pm
New grad negotiating for 20% higher salary on top of the options offered at a new start-up? 99% sure the hiring manager will tell them that the offer is the offer, take it or leave it.
You won’t know until you try.
Even if I don't have flexibility as a hiring manager, I always respect when someone asks for more. YMMV.

not4me
Posts: 556
Joined: Thu May 25, 2017 3:08 pm

Re: Stock Options?

Post by not4me » Thu May 16, 2019 9:59 am

I’ll approach a bit differently. 1st, consider the job. Is it what the applicant wants? Settling for? This will come across to some as idealistic, but best choice is to find a “job” that you’d do for free. People/place you like; job content challenging & well prepare you for advancing in your field? If not a desirable job for that person, they won’t be happy & will leave soon anyway, so don’t stress over it.

As for mechanics of stock options, I’ll also approach a bit different. This may seem in places like only semantics, but might be key for someone who doesn’t know options. They do come in different flavors & with no more details, can’t say for sure. It sounds to me that they have a “strike price” of $1 & the options can’t be exercised in less than 4 years. Most options I’m familiar with would also have a expiration date, likely 10 years. The clock for these would be from when the option is “granted”. So, a couple of questions come to mind: when are these to be granted? Annually/quarterly/etc? Do they expire & if so when?

A couple of considerations then. 1st, there may be some other benefits tied to “salary” – such as matching 401k contributions. It wasn’t mentioned & wouldn’t surprise if they don’t have that. If so, compensation in the form of options may be excluded. Type of option may get into whether the $s are included on W2 & fica, etc paid at time of grant or exercise. Being a private company, there likely won’t be an opportunity to exercise until the company is public. If it is sold before going public (ie another private company), are the options set up to survive the change of control?

The option gives you right to buy 1 share of stock at $1. So, the value to the job applicant is how much a share will sell at in 4-10 years (see above for assumptions there) after granting.

Would they have taken the job if offered $50k? Were they planning/hoping to move to a different job in 2-3 years? No one knows what future holds in terms of jobs, share price, etc – much less the values of the job applicant. To be honest, it doesn’t strike me right off that this is the type of job where top talent is being lured in & qualified applicants are hard to find. May or may not hurt to negotiate, but lesson earned there may not be what some expect it to be. What fit for those now in retirement may not fit for todays 20-somethings.

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