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

A bonus

[sigxcpu]

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.)

Newsweek

[mpweasel]

Check out the latest issue of Newsweek:

http://www.msnbc.com/news/937817.asp

Re:pin drop....

[Anonymous Coward]

Oh I've been getting them ... they just aren't worth anything.

Since 1999 I've got probably 17,000 options for the company I work for (I'm posting anon since my previous posts would identify said employer) in the computer field. A fairly large company that anyone who reads /. would know at least by name. The exercise price for the options ranges from $3something to over $35.

Of those 17,000, only 2,000 are going to cost me less than they are worth, and only by a bit over a dollar. Those haven't started vesting yet, either. Of the rest the exercise cost is $168,000 and their market value is $42,000 (at one point they were worth nearly $750,000 on paper but weren't vested so I couldn't exercise). Of course, most of those have at least partially vested by now but they're upside down.

I also participated in an employee purchase program ... I bought about 750 shares at $17.50 in the year before the bubble burst. They were worth 5x what I bought them for at one point and within a couple of months they were also worth less than $5. At this point I'm considering selling them for a loss as a tax shelter next year.

Options are a leash if you buy into them. I've been with this company for 4 years yet it will be another 4 years before I see anything significant from the stock options (and that's not counting the loss from the purchase program). Don't let options be a part of your decision to go to a company unless you vest FAST or you are so brainwashed that you -know- the company will be growing in 4 years.

They are great if you get lucky and make money, but it is no guarrantee. Don't let the offer of options let you settle for less salary than you are worth. I'm lucky, my salary is probably a good bit MORE than I'm worth, so I just look at the options and cynically chuckle.

FYI, www.mystockoptions.com has many useful tools to help people manage their options and do calculations on them.

Re:If I owned my own company....

[Jahf]

* Many of the companies that rely on options don't pay dividends.

* Forcing one to quit to sell stock is -not- an incentive to stay.

* Most option plans have a vestment schedule that means that the person with the options can take anywhere from 3-5 years to be able to buy those shares.

* Furthermore, if you immediately sell stock you bought you take a larger tax penalty than if you hold on to it.

Those last 2 bullets are what companies use to keep employees locked in with options. Very rarely will a company grant options that can be immediately turned around. I know in the case of the company I work for I vest a grant over a 4 year period. Once per month I get 1/48th of the grant vested.

Be lucky you're employed

[photon317]

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).

Learned Anything?

[Euphonious Coward]

If we learned anything in the crash, it should be that stock options don't count as compensation.

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).

There are correllations, but it's not easy.

[Anonymous Coward]

For the standard disclaimers: many people here know who I am, so I'm posting anonymously. Also, I've been on all sides of this issue, having been an employee for three pre-IPO companies, and a founder/employer at one, as well as an employee of one public technology company, so I've seen quite a few scenarios w.r.t. options.

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:

• The investors all have preferred shares. Often these have triggers on converting to common stock at preferential rates, which immediately dilutes you if that happens.
• Any round of funding immediately means a massive dilution of shares. While those people getting 3% of the company pre-funding may seem overly compensated, realize that AFTER funding that 3% may only be 0.3% depending on the valuation of the company
• At many companies, there is no pre-set set-aside for options (talk to a CFO friend about this one). That means that every additional person hired dilutes YOUR shares, because the company magically "invents" common stock to offset against those options.

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.