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?

Comments

Options seem less prevalent now

[Wee]

A high-tech Fortune 500 company I started working for in 1997 gave me 1500 shares, with a 5 year vesting schedule. I was hired on as an entry-level associate engineer. The total value of the options nearly equaled my yearly salary. From talking to others, this was common at that time. A friend who recently got hired at this same company as a much more senior engineer was given 500 shares. From what I can gather, at some point around the market bust (~2000), the company cut its option plans by about 2/3. One mitigating factor might be that the stock split a few times, and that caused people to think about the stock price more than their job or the company as a whole. There was an unseemly "gold rush" mentality that caused quite a bit of pain for a lot of people. The company could have reacted to this. I don't know.

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

Re:Zero-interest risk-free loan

[Slowping]

I agree dead on with what you're saying. And judging from some of the other posts, it seems that the general oppinion around here is the same.

Slightly off-topic, I think that if you really believe in a company and the company really belives in you, then both sides should be looking into some kind of stock purchase plan.

If a techie doesn't want to climb management and have the "security" that comes with having power over people, then the said techie should look into OWNING a piece of the company and having a say in how the company operates.

Sure, just one person might not be sufficient, but what if the entire IT department owned enough real stock to make an impact in the company's decisions?

Quantity of stock options doesn't matter

[MerlynEmrys67]

Don't worry about absolute numbers. I mean which is worth more 10,000 shares of a company with 1,000,000,000 shares outstanding, or 100 shares of a company with 1000 shares outstanding ?

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

Very simple

[swillden]

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.

Re:Zero-interest risk-free loan

[nelsonal]

Ironically if he had substituted risk free rate for zero interest rate, he would have been surprisingly close to the the black-scholes model. They can be summed as half the stock return (up or down for call or put, respectively)plus an risk free rate (US Gov Bond)loan or investment.