If so, you would probably want some acceleration so you could leave the company after the acquisition. Some companies also offer an additional six months of vesting upon acquisition if you are fired. If your options are priced near the value of the preferred stock, the options have less value.
Types of startup stock options
Only boards of directors can technically issue options, so you will typically not know the exercise price of the options in your offer letter until your board next meets. 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.
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.
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.
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Please keep your feedback and questions coming and let us know if you think we missed anything. This blog is powered by Wealthfront Corporation formerly known as Wealthfront Inc. The information contained in this blog is provided for general informational purposes, and should not be construed as investment advice.
These contributors may include Wealthfront employees, other financial advisors, third-party authors who are paid a fee by Wealthfront, or other parties. 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 are the top 10 questions I should ask about my stock options? -
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?
What is the market rate for my position? How does my proposed option grant compare to the market?
What is the vesting schedule? When do I have to exercise my options? Does anything happen to my vested shares if I leave before my entire vesting schedule has been completed? Do you allow early exercise of my options? Is there any acceleration of my vesting if the company is acquired? Are options priced at fair market value determined by an independent appraisal? What is the exercise price relative to the price of the preferred stock issued in your last round?
Make sure the company uses fully diluted shares outstanding to calculate your percentage.
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How much could the company be worth? Are you thinking about being sold? Publicly traded companies are another situation, Elkins notes, because you can typically purchase stocks at a discounted rate directly through your paycheck at a standard price. If a prospective start-up employer does offer equity, the job offer should dictate how much the company can or will offer you. Why the need for specifics? Rizzo says you should ensure that any offer you receive clearly states the number of shares to be received as well as the vesting schedule.
This is part of the vesting process. If you remain on board beyond that year, stock options begin to vest—or transfer ownership to you—over the remaining period of your employment on a monthly or annual basis. If you part ways after the vesting period has been completed, then the shares are still yours. With privately held companies, you should negotiate vesting periods and percentages, too. The employee will continue to hold the options even if no longer employed, unless the stock option plan states otherwise.
What are the top 10 questions I should ask about my stock options?
Most importantly, get everything in writing. Follow her on Twitter at vickisalemi. This article is not intended as a substitute for professional legal advice. Always seek the advice of an attorney regarding any legal questions you may have. Thank you! You are now a Monster member—and you'll receive more content in your inbox soon. By continuing, you agree to Monster's privacy policy , terms of use and use of cookies.
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