Better Understanding Your Employee Stock Options

https://medium.com/@iancorbin/better-understanding-your-employee-stock-options-9c4b147b5ded

by iancorbin • 11 years ago

19 4 11 years ago

bhayden2• 11 years ago

It seems to boil down to having to trust your employer to be honest to their word (and implications) about stock options and what their value really is. Even in the most trusted of environments, I still would not fully trust what comes out of the mouth of the person I'm interviewing with since they cannot speak on behalf of any outside investors, (other) founders, or anyone else with a stake in the company.

Given the nature of 99.9% of employer/employee relations, especially in salary negotiation, I would never personally place any value in stock options of any sort. There is simply no verifiable way to calculate what they are worth with a million different ways for them to become worthless and no accountability for a company to be entirely forthcoming.

mallyvai• 11 years ago

This is an absolutely silly mentality:

1) A lot of people do make money off of employee stock, you just have to be reasonably intelligent about it. This blog post is a good way to model risk/reward.

2) Thinking of your employer as your enemy is a great way to set yourself up for failure.

3) Don't think of stock as worthless, think of it as a bunch of lottery tickets. It has some probability of being worth something based on the lottery.

bhayden2• 11 years ago

The lottery comparison would be fair if the organization running the lottery was incentivized to not pay you if you won and could very easily, in both a legal and acceptable-in-the-course-of-businesss way, deny you your winnings. You are basically relying on a huge pool of people who are making the decisions to be a nice guy and true to their word.

I'm not suggesting you consider your employer an enemy, there's obvious a mutual benefit to you working there, but never should anyone assume a business has your best interests at heart because they almost never do.

dlevine• 11 years ago

Good summary of stock options, but it leaves out some critical points. Namely that the amount of tax you pay depends a lot on when (and if) you choose to exercise your options. In order to get the best tax treatment, you have to own the shares for at least a year. Otherwise, it's basically treated like income. If your company is acquired for cash and you haven't purchased your shares, you will usually be cashed out immediately at the difference between the strike price and the purchase price.

In addition, you may owe tax at the time you exercise the options if your strike price is below the fair market value at the time of exercise (also depends on the type of options, there are two).

Also, you say that employees can't exercise options until they have vested. The truth is that you can early exercise if that's written into the stock plan. It makes things a tiny bit more complicated for the employer, but can provide a huge advantage to you. Many startup founders down't know about this, but will add it if you ask. Effectively you can buy all of your shares immediately, starting the capital gains clock ticking and eliminating any tax liability at purchase. If you leave, the company has the right to repurchase any unvested shares. The only downside is that you need to come up with some cash upfront.

Better Understanding Your Employee Stock Options

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