Job offer includes stock options. What do I need to know?

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FriedBaloney
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Job offer includes stock options. What do I need to know?

Post by FriedBaloney » Fri Jun 07, 2019 11:37 am

I am expecting a job offer from a small healthcare startup. They say they offer stock options. I’ve never been offered stock options so I don’t know if this is a good thing or if it’s just hot air that the company thinks makes them sound appealing. How many is reasonable for them to offer or for me to ask for? What do I need to know?

dbr
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Re: Job offer includes stock options. What do I need to know?

Post by dbr » Fri Jun 07, 2019 11:45 am

I would say it is a good thing as long as you assume they are worthless and hope that someday they might be a bonus. This assumes the salary, benefits, and opportunity you see in the job is already justified options or not. It is a positive thing that it engages everyone in the enterprise.

You will probably eventually figure out that your share of the options is penny ante compared to that of the founders and executives, so it is hot air to a degree.

A funny story is that I had options in a job of that sort. After awhile for some reason they made a decision to buy back most of the options not held by the top guys. For some reason I don't understand we all got some cash and then a notice that we had all also realized a large tax loss. I made more money on the tax loss than on the options. I still don't understand to this day how that worked, but the IRS has been happy with it.

neilpilot
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Re: Job offer includes stock options. What do I need to know?

Post by neilpilot » Fri Jun 07, 2019 11:50 am

Find out the option terms. I accumulated stock options with a former employer that could be exercised after my 5th year employment anniversary. Unfortunately the department that reported to me was eliminaed in a restructuring, and I left the company 1-2 months short of 5 years. The options reverted back to the company.

A shame since about a year later the company was acquired by a competitor, and the options I no longer owned suddenly appreciated significantly.

MittensMoney
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Re: Job offer includes stock options. What do I need to know?

Post by MittensMoney » Fri Jun 07, 2019 12:02 pm

They may or may not be willing to give you this information, but here's what you'd need to know in order to "value" your options package (keeping in mind that unless the company is sold or goes public the "value" will remain on paper only)

- strike price of the options on your grant, and are they NSO's or ISO's. what's the vesting schedule? is there a 1 year (or longer) cliff? typically they'll happily give you all this info

- is there a discount to these shares compared to their "preferred shares" counterparts? in my company at least, the stock options granted to employees are non-preferred shares, meaning if the company is liquidated/goes bankrupt the preferred shares (owned by VC firms from series a-d funding rounds) are paid out first

- what is the fair market value for the enterprise? for a publicly traded company this would be their market cap, for a privately held company this number should be created & renewed once a year by a 3rd party auditing firm.

- what is the total share count at this time? Fair market value divided by total share count should equal the strike price on your grant, or if they're non-preferred shares your strike price could be 30-70% lower than that number (which is the case at my firm, we're given a hefty discount because the shares on non-preferred and therefore disadvantaged in some circumstances, but on the flip-side if the firm is successful and there's an exit it'll turn into a big advantage.) Regarding total share count, you should expect dilution to that number every new funding round.

- your 'stake' in the company (purely on paper until a liquidity event) will be the total share count divided by the amount of options vesting on your grant. most likely this will be a tiny, tiny percentage. In my case I have ~275,000 shares currently, with 1.25 billion in existence (0.022% of the company.) for fun, and only as a thought exercise, I like to imagine if the company went public at a $2 billion valuation my options would then be worth $440k. Keeping in mind your share will continue to be diluted each round of funding.

Some important notes: the amount of shares they offer you is essentially irrelevant, in a nominal sense. what's important is how many shares your offered relative to the total share count. at my company, that's 1.25 billion total, and at a friends company is something like 10 million so his 30,000 share count although seemingly much smaller is in fact a larger grant than mine.

The company may not (honestly probably just won't) give you all of this information before you're on the team. In that case you need to evaluate the offer based on cash compensation, benefits, role & company fit, and treat the options as 'zero value' because without the necessary information you can't truly know.

HomeStretch
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Re: Job offer includes stock options. What do I need to know?

Post by HomeStretch » Fri Jun 07, 2019 12:04 pm

dbr wrote:
Fri Jun 07, 2019 11:45 am
I would say it is a good thing as long as you assume they are worthless and hope that someday they might be a bonus. This assumes the salary, benefits, and opportunity you see in the job is already justified options or not.
+1

Make sure the option grant is included in your offer letter. When you are granted the options, you should receive an option agreement that specifies # shares, price, vesting period, etc. Keep copies of signed offer letter and option agreement for you personal employment files.

As it is a healthcare startup, it’s probably not a public company so there is a limited market for the shares upon exercise. The most likely time you will receive value for vested shares is if you exercise and sell if the company is acquired or goes public.

Taxation to the option holder (you) depends on whether options are Incentive stock options (ISOs) granted at fair market value or non-qualified stock options (NQ). You can google and read up on it, read the company’s stock option plan agreement section on income tax consequences or ask HR.

Skiandswim
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Re: Job offer includes stock options. What do I need to know?

Post by Skiandswim » Fri Jun 07, 2019 12:23 pm

Private firms with stock options need to issue a 409A Valuation report. An IRS Section 409A valuation is an independent appraisal of the fair market value (FMV) of a private company's common stock. This report will contain "fair market" valuation analysis methods along with financials. If the firm will provide you with the report, you may gain a much better understanding of the value of the options and risks the firm faces. At a minimum they should provide to stock price valuation.

Goal33
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Re: Job offer includes stock options. What do I need to know?

Post by Goal33 » Fri Jun 07, 2019 12:57 pm

Didn't read the other posts but important that you educate yourself on taxes and there's a lot of nuances when it comes to options.
A man with one watch always knows what time it is; a man with two watches is never sure.

quantAndHold
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Re: Job offer includes stock options. What do I need to know?

Post by quantAndHold » Fri Jun 07, 2019 1:08 pm

The main thing to know is that if it’s a pre-public company, you need to assume that the options will expire worthless. Something like 90% do, and unless you’re a founder, your option package will have too few options, at too high a strike price, for them to be worth much even if
the company eventually goes public.

When you’re comparing offers, you might as well ignore them.

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