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?
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 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.
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
Ash and Hickory, straight-grained and true, make excellent bludgeons, dandy for the cudgeling of vegetarians.
Oh I've been getting them ... they just aren't worth anything.
/. would know at least by name. The exercise price for the options ranges from $3something to over $35.
... 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.
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
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
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.
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.
* 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.
It is more productive to voice thoughtful opinions (reply) than to judge (moderate) others.
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.
The Alternative Minimum Tax (AMT) will treat you as if you had income equal to the difference in the strike price and sale price on the day you exercised the options and you will be liable for the income tax on that amount.
Just being granted options that happen to be in the money will not cause this problem.