A recent LawTrades user asked: I am applying to startups. How should I be thinking about stock options?
(1) Seek percentages, not figures. Understanding what percentage of the company you own is usually the threshold question. That means knowing both the number of authorized shares, as well as the actual number that’s been issued to date. Having those figures will allow you to see the forest; without those numbers, all you can see are trees. You need to be able to see how big the forest actually is in order to adequately understand where you are and how much of it you own. Although this information alone will not reveal the value of your options, it will be helpful to seeing the wider picture.
(2) Understand where you fit in. Since stock options usually consist of common stock, you’ll need to obtain a better understanding of where and how you fit into the larger debt and payout structure. You’ll want to find out how much debt and equity the organization has – specifically, how much preferred stock has been issued. Preferred issue gets paid prior to common stock, so knowing this information will tell you what – if anything – you can realistically expect in the event of a buyout.
(3) Find the floor. Common stock won’t really be worth anything until your company gets acquired or goes public. Try to assess the potential minimum value of your options by asking how much of a specific acquisition price (e.g., $500 million) will be allocated for common issue.
(4) Negotiate priority. If you’re given common stock and are able to negotiate, see if you can move into position behind debt, but ahead of preferred. Incorporating terms that elevate your priority in the event of a buyout are not unusual.
(5) Know the funding forecast. If there’s more financing on the horizon, then there’s also more dilution. Those are clouds you can easily identify by learning about financing plans – imminent or long-term.
(6) Unpack your vesting schedule. Most vesting schedules are four years, with a one year cliff. That means if you leave before the first year, you get nothing. After the first year, you will start to accrue a percentage of your share – e.g., an additional 25% each year, with 100% over four years.
(7) Learn whether you can accelerate. Accelerating your vesting to 100% before the end of the vesting period is a common feature of stock option agreements. Identify your acceleration rights, and whether a single or double trigger event is required. A single trigger event is typically where you’re terminated without cause. A double trigger requires two events, usually a termination without cause and an acquisition.
(8) Expand the scope of your compensation. Whether you’re C-level or not, you still need to eat and pay the bills. Make sure you’re receiving benefits aside from an equity position that has no value unless and until the company is acquired or goes public. Cash compensation helps. So do things like insurance benefits, educational opportunities (including conventions and tradeshows), vacation and flex time, gym memberships and quality experience that you can carry with you well into your career.
(9) Assess your strike price. This is the purchase price of your options. The difference between the the strike (purchase) price and the market value on the day you exercise your options is your profit (assuming the stock has appreciated).
(10) Know your expiration date. You need to know when your options expire or terminate. Should you remain with the company, your right to exercise options will normally expire after 10 years. On the other hand, should you be terminated, you will usually have about 90 days to sell your options.
(11) Gauge transparency. Transparency can be overlooked and high undervalued. A company that is able and willing to share with you critical financial and operational information is an organization you can – and should – believe in. Companies that value open communication and accessible information about business processes tend to be high achievers. Whether it’s asking about capitalization or the most recent valuation, a company that’s ready and willing to share this information with you is one that’s likely to play fair with you on all fields.
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