They can also be smoke and mirrors, or a pea under a whole bunch of walnut shells. The classic stock option is an option to buy a share of stock at a specified price. Say you get to buy some number of shares for a penny each.
Equity 101 Part 1: Startup employee stock options
If those shares are worth meaning they can be sold legally for more than that penny, you make money. In theory. Understand the basic numbers on shares in a company: charters specify how many shares there are, and if you know that number then you can guess what a share is options in a startup worth by dividing what the company might be worth by the number of shares outstanding.
None of this matters until a company is actually traded. Call that a liquidity event, and investors call that the exit.
How to Make Startup Stock Options a Better Deal for Employees
Meaning that it was pretty hard to sell them; usually impossible. Shares can also be worth money when a big company buys a startup. If the buyer pays cash, then people with options get to cash in as long as their option price is lower than the per share price of the acquisition. These days IPOs are extremely rare, so exits are usually by acquisition.
Understanding Startup Stock Options
There are a lot of legal restrictions. Stock options have been abused for years.
So the government watches them very carefully. Issuing stock options takes some legal work. People get fooled by stock options.
They're potentially lucrative, but also complicated and definitely not a sure thing. Get the right advice before you make any moves. Instead of getting a big paycheck, a large portion of your compensation will come in the form of stock options.
I know someone who left one company to go work for another because the second one gave lots of stock options. It felt like a lot of ownership, but there was no chance the second company was ever going to succeed and achieve an exit. So options can end up being like shiny things to lure people, with very little value.
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When you get offered stock options in a startup, you have some tax choices to make. Your share percentage can change.
The market for talent is competitive in Silicon Valley newsflash! A common feature of most of these offers is an option grant on a four year vesting schedule. Often, these options are worth as much if not more than the base salary offered, and so evaluating competing offers on a financial basis can get pretty complex. Typically, candidates will consider the value of the options at the most recent price for its shares, but there are big problems with this approach. To really understand the value of these offers requires having an opinion about the value of the company, something that is far outside the domain expertise of most tech talent not to mention many tech investors.
You might have options forshares in a company that has 10 million shares outstanding. But sometimes that same company can issue new shares and bring in new investors in a way that dilutes your option shares. So they decide to get investors in by giving them 10 million shares and they just issue those shares. Your 1 percent just became half a percent. Companies that give away options too easily can hurt their capital structure.
10 Tips for Dealing with Startup Stock Options
If a lot of consultants and advisers and accountants and lawyers are getting compensated for their professional work with stock options, then investors are less likely to value the stock. A lot of startup business plans try to define how much stock ends up in the hands of founders, employees and investors.
The best use of stock options in a startup mode is as a message. That included some people who were very low on the pay scale but had been given options early. Stock options are normally vested over a period of time, rather than given all at once.
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Options are not really yours until they are vested. For example, options might be vested over two years.
Options in a startup makes a big difference. Was this article helpful?
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