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

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.