Slashdot Mirror
Stock Options - What's Fair?
will-code-for-options asks: "I work for a technology company that makes stock options available to its employees. Assuming there is a correlation between employee title/rank and the number of options awarded; what do hi-tech professionals consider a 'fair' stock offering to be? What would be a 'generous' offering? Obviously there are a tremendous number of variables that influence a company's stock offering policy; all I'm really looking for are some data points to help serve as a guide. The (potentially complex) responses to this question could really help those of us who haven't had experience with the stock option lottery." Ask Slashdot last touched on this subject in the early days of 2000...needless to say that the economic climate has changed since then. Are stock options still worth anything, in today's economic climate, or should they be avoided?
From the silence in which you could hear a pin drop, I'm guessing not many of us are getting any options right now, so my tentative guess is somewhere > 0
Maybe this is crazy, but what about awarding voting-class stock in the company based on a person's meritocratic worth?
I'm as mimsy as the next borogove but your mome raths are completely outgrabe.
I would consider options as a bonus, not part of my salary.
what I mean is always consider the chance that they will be worthless.
I'm currently stuck with a zillion $50 options for a stock that is right now worth ~$5.
(and I considder myself - lucky I didn't lose any real monny, just Imaginary munny.)
As of Postgres v6.2, time travel is no longer supported.
Check out the latest issue of Newsweek:
http://www.msnbc.com/news/937817.asp
I would prohibit anyone (including myself) from selling company stock until 90 days after they left the company. You shouldn't buy stock to get rich quick, you should buy stock because you believe in the future of the company.
Of course, there'd be nothing to prevent you from getting dividends on the stock, so you'd make a little money from it in the meantime. But I don't want anyone working for me who plans to artifically pump up the stock price and then bail after they cash out.
I think of options as a zero-interest risk-free loan used to buy stock. If the price goes down, you lose nothing. If it goes up, you repay the loan when you exercise the options. So the first data point to use in valuing the options is the strike price times the number of shares. Beyond that, it's simply a matter of where you expect the stock price to go between now and when you're likely to exercise them.
Assuming there is a correlation between employee title/rank and the number of options awarded...
Uh, I'm not sure which of your orifces you pulled that assumption from but I've never heard of such a thing. I've always seen options given out to employees whom the company values highly and wants to keep for the long haul, independent of their title/rank/seniority. People who have been with the company long enough to achieve some measure of title or rank probably have quite an investment (financial, emotional, or otherwise) with the company. So I don't see why a company would necessarily give those employees a larger number of options than talented newcomers who could "fly the coup" more easily.
GMD
watch this
It seems that other companies are less likely to use options as the big enticement they were used as a few years ago. Most of the people I know got few if any stock options when they were hired. Six or eight years ago, it was almost expected in high-tech. I think the bubble popping had a lot to do with this. Whether it's a case of the prospective employee thinking that stock won't be worth anything, and is therefore valueless as a "benefit", or the employer wanting to use more directly obvious compensation, I don't know. Since it's a buyer's market, companies might not feel the need to use options as a lure.
Offhand, I'd say that if the company has a good 401(k) match, good health care, job security, and offers a reasonable or generous salary, treat any options you get as just a possible bonus later on down the road. Put another way, you shouldn't count on them being worth anything, and so they shouldn't factor in as compensation when deciding to take a job or not (don't give in to arguments like "Company A is giving more options, but Company B pays more..."). Although there are worse decisions to have to make, eh?
-B
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IANAL, so don't take this as legal advice but you should watch out for tax liabilities that may come with stock options. The worst case scenario may turn out to be you paying taxes on paper profits even though your options become worthless.
"When you sit with a nice girl for two hours, it seems like two minutes. When you sit on a hot stove for two minutes, it
Okay, here is my take.
Options are really worth it if you are in on the ground floor. I have a neighbor who was one of the early Red Hat employees. From Edgar it looks like he had ~500,000 options at about a buck. Considering they split twice, he was looking at ~2,000,000 options at about a quarter each. He's retired now.
My case was different. I was a grunt in a company that went public. I was granted 6000 options at US$4/share, to vest over four years. On my first year anniversary, I had 1500 shares and the stock price was US$44/share. Now, while my boss (who had over 144,000 options) was driving a new Porsche, I was not going to retire on ~US$60K, so I decided to exercise my options, yet hold on to the stock for the long term capital gains (keep it a year, pay less taxes).
A year later the stock was less than US$4 a share. Also, there is this thing called the Alternative Minimum Tax (AMT). Imagine my surprise when TurboTax told me that the government acts as if I had actually made US$60K that day, and it wanted its share: US$20K.
Yes, I am an idiot. Yes, I lost my shirt.
The moral? These days, options aren't that valuable unless you have lots of them. Also, exercise them as soon as you can.
What's funny is that senior executives are now refusing stock options and asking instead for preferred stock. Preferred stock pays high dividends. Under the new rules, dividends are not taxable as income. Go figure.
I can't give you anything other than general platitudes about normal size of grants. I'm a finance guy in the public sector, options in the state would probably have negative value, but I can tell you a few things about how to value them and the like. Microsoft is the only one that really reports in any sort of detail about their option plans. From what I have gathered they give options with a grant value of about 30%-50% up to 100% or more for developers of what I'd estimate to be salary expense. That is probably one of the more generous plans available.
More specifically they are valued using a model called Black-Scholes it's a binomial probability tree that maps out the likelyhood of a given option finishing in the money*the payoff of it finishing in the money. It's not perfect but it works pretty well, if your company is publicly traded, you can usually find a quote on options out a year or two from a financial page, those should serve as a check on the B-S estimate of value. Because of the current view by the accounting community you are likely to get options for only a few more years and then stock grants will become more popular (they cause less dilution since you get the entire value of a share rather than the difference between strike and market value). Other than getting hit for an AMT bill (an old loophole closer that never moved up for inflation) they really can't ever be a bad thing for the grantee. Just make sure that you speak with an accountant about tax implications as your excersise dates arrive, and you should be just fine.
Finally, don't borrow against their value, or spend the money their worth until after you have sold the stock, and don't keep all your investments tied up in the investments tied to the company that employs you. If you feel the need to hedge your options before they vest you can speak with a good investment counselor (he should know right away how to do this if he doesn't find a different one--short sales or collars would be words you want to hear quickly).
Degaussing scares the bad magnetism out of the monitor and fills it with good karma.
is my general response - this is no longer the stock option era we were in before.
But for a datapoint from the past, at WorldCom the "good" package for well-liked VPs and senior technical staff was worth on average about 150-250k/year pre-tax value after cashing them out (if you did so immediately). Of course that's all very rough numbers, dependant on values that they could have only vaguely predicted. They were good for another 7 years afterwards which could have led the values much higher, or could have led the values way below zero (as happened to be the actual case for those who didn't cash out back when they had the chance).
The "standard" package they gave virtually every full-time employee by contrast was worth on the order of 5-15k I think (I don't remember for sure what they were valued at).
11*43+456^2
In other words, options are not for your benefit, they're for the company's benefit. So, depending on how much and for how long they want to tie you up, they'll offer more or less, vesting on such and such a schedule.
While options might make you more likely to hang around and bust your hump, they give the company incentive to dump you if it looks like the options might end up more valuable than your continued presence. I've seen this: a friend was at a startup that laid off all its developers just before they got any vesting, and hired a new, smaller crew to finish up. The same friend worked at another place that, when it was bought, invalidated all their options and assigned new ones, and reset the vesting clock to zero.
It's only after you start the job that the options affect your choices. Then, you trade off future value of the unvested options against other opportunities. That is, unless you don't plan to be there very long. Even then, it might be unwise to haggle for a bigger salary and smaller option package, 'cause that will make them think you don't plan to be there very long, or don't hold out much hope for their prospects.
Since options' value is so uncertain to begin with, and because companies have so many ways to drain whatever value they might gain (e.g. dilution, strategic bankruptcy, mergers) you're usually best off just ignoring them until they vest, and then exercise and sell them if you can (yet).
What you want to do is figure out what your percentage of the company is, then ask their HR person for a count of shares outstanding and do the division yourself.
The otherthing you can do is just say "I want options for x.y% of the company, make it happen
Anyone who says you need at least 10,000 options is silly
I have mod points and I am not afraid to use them
This is an easy question, although you have to make a whole bunch of wild guesses to answer it. Here's how:
Look at the options you're being offered. How many shares, at what strike price, what vesting period and what expiration. The first thing to look at is the vesting period, and decide if you're likely to be at the company that long. If not, go no further, the options are worthless to you.
Assuming you're going to be around long enough to vest, look at the current stock price of the company and make your own best judgement of what the company's prospects are and what you think will happen to the stock price by the expiration date. A good way to do this is to decide how much money you think the company will be making every year at expiration (non-trivial, but do the best you can), multiply by the expected profit margin to get your guess at earnings, and then multiply by, say, 20, a conservative price to earnings ratio. Be conservative in your guesses; especially since everyone at the company is going to be really optimistic.
Now, you have two numbers: Expected stock price at expiration, and strike price. Take the difference, multiply by the number of shares and you have what you think the options are worth.
Now consider the fact that this money isn't money you get right now, but money you get in X years, so discount it somewhat. Say 5% per year, so if the options expire in 10 years, figure the money is only worth half of what you just calculated. To be really thorough take some taxes out of it, too.
Now look at that dollar figure, which is a really rough but usable SWAG at the net present value of the options offer, and decide if you think it's reasonable. At this point it's just dollars, and we're all much more familiar with evaluating the worth of dollars.
If you like spreadsheets, you might try making up several guesses at the future stock price, weighting them by likelihood (more guesses!), do the calculation each way and then make a weighted average to get a better guess at the value of the options.
There ya go. Employee Stock Options 101.
Note to ACs: I usually delete AC replies without reading them. If you want to talk to me, log in.
Stock options are a way of saying to an employee, "You're worth more than we're paying you, and we can't afford to give you the pay you deserve, so we'll give you a tiny cut of the company itself, instead."
A not-yet-profitable company uses stock options to keep employees around until the company becomes profitable.
A profitable company either doesn't issue stock options, or it issues them to suckers who will take them in lieu of a real salary (see Microsoft) as a way to limit per-employee costs.
If you're company's both 1) profitable and 2) offering stock options, then they think you're dumb enough to fall for it. Tell 'em to stuff it and ask for more money instead.
Forward, retransmit, or republish anything I say here. Just don't misquote me.
all I'm really looking for are some data points to help serve as a guide
S'easy. Take the price that options are offered at ($x per share) and make up a number that you think they'll be worth when they vest (usually over 3-5 years) ($y per share). These options are worth ($y - $x) per share.
The problem, of course, is you have no idea what $y will actually be, but, hey, that's life.
But, on the useful side, here are some things to watch out for:
Most stock options vest over a certain number of years. Until that time, you can't exercise all of them. Furthermore, most stock options are only exercisable while you work for the company, so if they vest over 4 years, to get the full value from the options, you have to still be working there 4 years from now.
Sale of stock that you haven't held for at least 2 years (starting at the time you exercise the options, not receive them) is taxed at the higher capital gains rate.
Some companies may give out restricted stock options. Selling restricted stock is a real pain in the behind, and requires you get your company's permission before selling it.
Most companies have to be careful to not dilute their share value by offering too many stock options... This is something to keep in mind when judging fairness. The more options that become available to the employees, the less value outstanding shares hold.
A generous offering of stock options in a pre-IPO company would be 1-3% of the employee's salary in options. A small company starting out might even consider between 5-15% to boost employee interest. For example, if employee earned $50k a year, then if the rate of options granted to an employee is 3%, the employee would receive 1,500 options. Also the vesting period should be considered. Most companies that offer options set their vesting period between 1-4 years for the whole option grant. The company I work for is quite aggressive, so 50% of my options vest immediately upon issuing of options, while the remaining 50% vest 1 year after the options have been issued.
Of course you may luck out, and sell them at the high point and make much more than that, but it's never possible to know where the high point was until the stock has tanked.
Basically, they're typically worth very little, but employees imagine that they're worth a lot, and that's why employers think that they are good incentives ;-)
-WolfWithoutAClause
"Gravity is only a theory, not a fact!"> today's economic climate, or should they be avoided?"
Ask ESR, he should know.
How about just giving them cash instead -- even depositing it into a 401k or Roth IRA -- and letting them decide how to invest it themsevles.
There is a rationale behind giving executives and others with enormous individual impact on the corporations a stock-position. It encourages them to act for the good of the company.
But normal employees -- just give them an equivalent amount of money. It is a bad idea for employees to be invested in their own companies stocks anyways, as they will make irrational and emotional decisions, holding onto the stock when they really should sell it.
social sciences can never use experience to verify their statemen
The most important variables that I've seen which would impact your option package are when you joined the company w.r.t. its current market position, and how senior you are. There IS a strong correllation between your position/salary/department and your option package in my experience. For example, a VP in any department usually gets more options than the most senior engineer, but an entry-level engineer usually gets more options than a relatively senior person in marketing. Sales guys just laugh at options.
The other major part is WHEN you joined, and how far along the company is. If you join before the first institutional round of funding (i.e. self-funded or seed/angel money), expect to get somewhere around 1-3% of the company as a technical staff member. AFTER the first or second institutional round, expect to get about 0.05-0.1% of the company depending on how good you are. Yes, the only thing that matters is your percentage: quantity of options are generally irrelevant, though most VC-backed companies strive for a rough $1/share level because it makes the mental math easy on the VCs since negotiations are at the $/share level, rather than directly at the % level.
But bear in mind that you can effectively be screwed at any time the company likes if you're in a pre-IPO company, because there are any number of things that will dilute your stake that you have NO control over:
At a public company, use Black-Shoales to figure out the rough value of the shares. Mine (I left the public company before my cliff date [fool!]) were worth $1m one day, and a year or two later worth $100k, so even this is a crap-shoot.
Basically, everybody who tells you not to count on them is saying the right thing: get a good tax guy (make sure he's done AMT before), a good broker, and just forget that the options exist in terms of your compensation: options are usually pretty closely tied to salary until you get into executive ranks within a particular department, so if you're comfortable with the salary, they're probably giving you the right number of options.
What you have to remember is that the incentive to give you options is basically giving you pocket full of money (and watering down stock value) without telling investors they are doing it. After all, what investor is going to buy stock in a company that does lots of options? That would be akin to a government printing extra money to pay off thier debts. And yet, with stock options this is exactly what is happening.
The only difference I suppose is that the government had more at stake unless thier assets were already transferred into foriegn currency.
So take options if they give them to you, but at the same time, remember that if they give too many options out, what they're really saying as a company more often than not is "we don't care about our investors". If they give this kind of attitude towards thier investors, do you think they'll treat thier employees any better in the long run?
If your company is not public [and I assume it's not]:
Your company *will* have a projected budget for 2-4 years down the road [otherwise, don't take the job]. From that they can compute what the Stock share price should be around that time. Divide your position's mean salary by stock price, and that's likely the # of options over a 4 year period.
If your company is public:
Use the 1yr projected price instead.
[note: if you're a director or better, multiply by some constant, which is directly proportional to the amount of golf you play]
At the time of hiring, only the board of directors and extremely high management received stock options.
After the company went through layoffs in 2001, all survivors (and new employees) were granted stock options -- 50 options/year for 4 years (200 total), expiring in 2010. The strike price was ~16.60 (the market price when they decided to grant them). Currently, I have 100 options.
Since being granted, the stock price has ranged between 18 and 9 dollars. Less than 15 days have been spent above water (stock price is almost at par level currently, and could increase if the company doesn't screw up).
The stock options have done jack shit for me. I outright own around 1,000 shares from the ESPP (weighted average around 11.00 a share), although they don't affect how I do my job (other than knowing I can quit anytime with a nice cushion if I can't find work for a while).
I work for a technology company that makes stock options available to its employees. Assuming there is a correlation between employee title/rank and the number of options awarded; what do hi-tech professionals consider a 'fair' stock offering to be? What would be a 'generous' offering?
If your company is publicly quoted, you can work out the value of the options for yourself. Get the historical data for the share price and crunch it through the Black-Scholes algorithm (any derivatives textbook will cover this).
Then, and only then, can you decide what is "fair" or "generous", by thinking about how likely it is you will ever convert them into cash. Also think about the non-cash value... do you want to be a shareholder in your company? You might be surprised how little stock one actually needs to own in even the largest companies to be entitled to attend AGMs and ask questions of the board. If you plan to stay with this company long term, that might be a nice privilege.
One word to the wise: I saw many people in the dotcom era who spent the money they expected to make from their options before said options had vested. Yeah, they lost a lot of money that way. Think about options as a perk or a bonus, not part of your salary and benefits. Some companies like Microsoft are granting actual stock now instead of options. That's good and bad. Good because if the market falls you'll still have some value, bad because you will still have to pay tax, whereas options are tax-neutral unless you exercise.
you pile of shit.
At yearly appraisales, in the awarding of bonuses. They determine how much of a percent(of your gross salary) to give you as a bonus, I think 10% is the max across for anyone, then you get 1/2 of that in cash the other in stock options.
We are primarily a contractor based company so when the office I work in wins a big contract they award cash/stock options to thoses who worked on the contract. In addition they identify "key people" in the contract, theses people get stock options if they work on the contract for a couple of months, the amount is a flat rate awarded to each key person.
In addition ever so often if the contract is doing good and we are geting the bonuses from the customer, they open it up so that if you purchase a share of stock they give you 1 or 2 stock options, the amount of you can purchase is the same for everyone, and so far has had a max amount of around $3000.
Apparently this happened to lots of dot-bomb employees, according to a magazine article I read:
Public company, trading at $10/share.
You make $75K/year.
You are granted 10000 options - you have to wait 6 months to sell.
Tax year ends.
IRS sees your grant as being worth $100000, applies AMT and says you owe $33,000 on top of your regular taxes (say $10000).
Dot-bomb.
You stock is worthless, you never got to sell it. Company closes down, you're out of a job.
You still owe $43,000 to the IRS.
My God, it's Full of Source!
OUTSIDE_IP=$(dig +short my.ip @outsideip.net)
It's funny to think that people aren't as interested in stock-options after the bust. NOW is the time to get options, when prices are low, especially since there's no risk to the employee. It's also likely the reason that companies are less willing to give them out, as they're counting on their shares rising in the coming years.
That said, I generally think of stock options as if they're a gift of lottery tickets. They're free; they could pay off; but unless you're in a very small company (or very high up in a larger one), there's little you'll be able to do to affect their value.
Same-day sales aren't taxed quite as low as long-term, but they're a lot better than short-term
Never, ever invest in company stock. Investing in company stock is always an emotional experience (you want to see your company succeed, and it will succeed through your efforts, etc.), and your better judgement will always be clouded by emotions. Nobody should be delving into stocks while letting emotions rule their decisions.
With that said: If you are being offered options, take them. As soon as you vest, cash out. Otherwise, your emotional ties to the company will cause your good judgement to take a flying leap, and you will most likely end up holding a worthless options contract. Remember also that some companies require you to pony up the cost of your options at their strike price before they'll exercise your options. It's a bit tough trying to cash in on options when you don't have the cash-on-hand to begin with.
Stock options now are vastly overrated. I would not even consider them as part of a compensation package. You should be negotiating compensation as if stock options weren't involved. If anything, they should be icing on the cake.
My current company grants a stock bonus (that's stock, not stock options) at the end of each year. Each employee's bonus is some percentage of the employee's annual salary. The exact percentage is set by management every year based upon the company's performance during the past year. Thus, the higher up you are in the food chain, the bigger your bonus.
For instance, let's say the bonus percentage is 15% for this year. If an employee is making $60,000 a year, he or she will get $9000 worth of company stock as a bonus. If another employee is making $100,000 a year, he or she will get a $15,000 stock bonus.
One nice thing about this company's plan is that the stock is unrestricted. There is no vesting period, so you can sell it at any time.
Also, one other thing I should mention is that your manager has to "nominate" you for the bonus. If you aren't nominated for that year, because your performance is bad, then you don't get your bonus for that year. This may sound onerous, but in my experience, pretty much everyone gets nominated, unless you are a total screwup, in which case you probably won't be with the company for long!
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www.moneybythenumbers.com
I got in on the ground floor, or perhaps the second floor, of a company in the mid 80's. I had a lot of stock options. 15 years later, the company was still privately held and the company's principals were screwing around with getting a low company valuation to minimize outlay whenever they were going to do a "spinoff" (knowing ahead of time that they would be buying back a bunch of options). People started figuring out that the company didn't really have any intention of ever going public and that there was a bit of a con game aspect to the stock options. A lot of people got screwed after a long career at the place. I came away with nothing in spite of the company having grown 30-fold during my time there, and others got screwed a lot worse. From a purely corporate standpoint however, they were good tacticians and made good use of using stock options to retain employees.
What did I learn from this? If I were the corporation, I would not try to create a generalized or "fair" stock option policy. It has nothing to do with fairness. Tailor stock options to the individual and negotiate for your interests. If employees are naive about this stuff, you can tell them anything you want to. Do like my old employer did and don't tell anyone how many actual shares there are in the company, then you can issue however many options you want and just hint to employees that they could be filthy rich someday. They want to believe that, and if you let them believe it, they will. If employees are jaded and cynical, the perceived value will be much lower, and you might be better off deemphasizing the options package in favor of health benefits and salary. It depends on your interests and what you're trying to accomplish by offering your employees stock options.
A while ago, I used to work for a company that was using stock options to lure talent (this was during the tech boom). At one time, I had a few thousand options available to me, and although I never confessed this to my supervisors, I thought (no - I KNEW) the whole thing was a joke. I had several reasons for feeling this way, among which were the fact that being a programmer, I could be handily laid off as soon as my work was completed, thus preventing me from vesting my options. In fact, I realized that this made good business sense from the company's point of view and I fully understood that this was *exactly* what was going to happen. And, this was during the tech boom. Oh, there were other aggravations, like the fact that programmer's options were tiny compared to those of the "creative" staff. But the threat of layoff was the big one.
Fast forward to 2003. Companies are eager to outsource and lay off every staff member they can. You have to know, going into any private or publicly held company, that you are eventually going to be canned. And, you also have to know that there is no way they're going to let you stay long enough to vest your options. During the tech boom, it was a suspicion (that proved accurate). These days, it's a certainty.
What I'm saying is, options were ridiculous during the tech boom but now they're absolutely absurd.
Pay your workers a living wage, give them a good benefits package, let them work a 40 hour week, and don't ride them too hard. Forget about options. Just show some respect and loyalty, and you'll be all set.
Farewell! It's been a fine buncha years!