Before signing on the dotted line, make sure you understand the basics of equity like what vesting , cliffs, and strike price mean so you can evaluate your offer. You should also ask a few standard questions to make sure you are getting a fair equity grant that represents your potential contribution to the company. Make sure the company includes all outstanding shares including preferred stock , restricted stock, etc. Otherwise, your actual percentage could be smaller than what they say, and you might not be comparing offers apples to apples if two different methodologies are used.
Make sure the company has an established method for figuring out how many options to offer instead of coming up with a number willy-nilly. The later stage the company, the more built out the system should be. Ideally, the company maps each role to a level and a corresponding equity and salary band.
What Are Stock Options And Other Questions You've Wanted To Ask - York IE
No system? Then your offer might not be very fair. In other words, will you be able to sell shares before an exit like an IPO? If the company intends to remain private for a while, ask if they will hold tender offers opportunities for shareholders to sell shares of equity. Note: approach this topic delicately.
If the company is unwilling to budge on your equity offer and you feel it is too low, ask whether they offer equity refresh grants after a certain amount of time or in certain situations, like if you get a promotion. A refresh grant gives you a separate set of options that vest over a new period of time. Our free equity calculator can help you understand the potential financial outcome of your offer. While the three questions we covered earlier can help you understand the basics of your offer, the answers to these questions below will help you dig into the details:.
If your proposed employer is private then your board must determine the exercise price of your options by what is referred to as a A appraisal the name, A, comes from the governing section of the tax code. Most likely that means your exercise price will go up, and, correspondingly, your options will be less valuable. Not all companies have the same potential upside. Generally speaking people make more money on their options from increasing company value than they do from securing a larger share grant offer. Additional financings mean additional dilution.
If a financing is imminent, then you need to consider what your ownership will be post-financing i. Refer back to question number one for why this is important. This might seem counterintuitive, but there are many instances where you are worse off in a company that has raised a lot of money vs.
How Do Employee Stock Options Work?
The issue is one of Liquidity Preference. Venture capital investors always receive the right to have first call on the proceeds from the sale of the company in a downside scenario up to the amount they have invested in other words priority access to any proceeds raised. Investors will only convert their preferred stock into common stock once the sale valuation is equal to the amount they invested divided by their ownership. You never want to join a company that has raised a lot of money and has very little traction after a few years because you are unlikely to get any benefit from your options.
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As we explained in The Wealthfront Equity Plan , enlightened companies understand they need to issue additional stock to employees post-start-date to address promotions and incredible performance and as an incentive to retain you once you get far into your vesting. For more perspective on this issue we encourage you to read An Employee Perspective on Equity. As a result employees tend to be given fewer RSU shares than they might receive in the form of stock options for the same job.
We hope you find our list helpful. Please keep your feedback and questions coming and let us know if you think we missed anything.
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Unless otherwise noted, the content of such posts does not necessarily represent the actual views or opinions of Wealthfront or any of its officers, directors, or employees. All rights reserved. Please read important legal disclosures about this blog. He serves as a member of the board of trustees and chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship.
Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware. View all posts by Andy Rachleff.
When you receive an offer to join a company, I encourage you to ask these 15 questions to ascertain the true attractiveness of your option offer: 1. What percentage of the company do the options offered represent? Are you including all shares in the total shares outstanding for the purpose of calculating the percentage above? Combine these into a plan that has multiple types of stock grants and multiple awards over many years, and the possibilities are endless.
Often a first step to getting this organized is to ask a few key questions about what you have, when you have it, how its taxed, and how it fit into your financial plan. A lot of this can be done with simple questions to the right people. Once you have the information, you should use it to develop a plan and a strategy to meet your goals. A good strategy is one that meets both your short- and long-term goals while having an eye towards tax, risk, and financial needs. If you find yourself paralyzed by the complexity of it all, you may want to seek out the resources of a qualified professional.
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. Tax services are not offered through, or supervised by, The Lincoln Investment Companies. The hypothetical examples included are for illustrative purposes only and do not attempt to predict actual results of any particular investment.
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