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What are Share Options Worth?

Posted by Cliff on from the are-they-worth-it? dept.

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;

  1. How long did you have to keep them ?
  2. What was the increase (or decrease) in value ?
  3. Do you think it's a good idea ?
  4. 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? "

4 of 124 comments (clear)

  1. Get the facts and apply common sense by geophile · · Score: 5
    The options will have value if your company goes public or is acquired by a public company. One of these things will happen if your company has a useful product and sufficient buzz. A useful product is not enough by itself; if it isn't known it won't matter. Competitors with better marketing will be better known and will get the bucks first.

    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:

    • 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. If your company is sold for $100,000,000 and you own 0.1% you get $100,000. It doesn't matter if you had 5 shares or 500,000 shares.
    • Try to figure out if an IPO or an acquisition is most likely (And don't just listen to what the CEO says.) In case of an acquisition you can get burned badly by liquidation preferences. You have to keep an eye on this as the rounds of funding come in -- it gets renegotiated each time. I let my CEO know that I'd hit the road if we ever got burdensome liquidation preferences. This made a huge difference in the cash I took away from my last company, since we were acquired at a price where the preferences almost mattered. (Liquidation preferences are goodies that go to VCs if the company is acquired for less than a certain price. First they get back their original investment; then they get their fractional share of the remainder. Employees get shagged rotten.)
    • Another thing to watch out for in case of acquisition: What is the acceleration schedule? If you joined this company today and they were acquired tomorrow, you would have vested in zero shares. Your options will still be worth something, but the payoff is still in the future. Sometimes there is acceleration by a certain number of months (18 is typical) which means your vesting schedule accelerates that much. In the scenario just described, with 18 month acceleration, you would immediately be able to cash in on 18 months worth of your options.
  2. More to watch for... by curtis · · Score: 5
    I just went through a public offering last fall myself. I know from my situation a few things that might be useful:

    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.

  3. Caveat Employee by Wellspring · · 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.

  4. Recent Infoworld article by Thwyx · · Score: 5

    Infoworld has an article in the most recent issue related to this topic. You can find it online at: Should you leave your job for one at a startup?