Your Options

Is it really an offer you can’t refuse?

A company offers you a job that comes with options. You’re excited and you’re a bit overwhelmed. How valuable is this offer, exactly?

The big thing is knowing what percent ownership you have in the company. This is even more important than how many actual options you get. You can figure out your percentage by dividing your number of options by the total number of shares outstanding. Those outstanding shares include shares issued to the founders, options reserved for employees, and shares sold to investors. Typically, the amount of options reserved for you and your colleagues (and future colleagues) is around 10-20%.

Also check your option grant letter itself for your strike price, which is the cost to turn your option into a share in the company. At the time of your offer, your strike price will be the current Fair Market Value (FMV) of a share, which is determined by a 409a valuation. If things go well for the company, the FMV will increase, while your strike price doesn’t change. The difference between the FMV and your strike price is what you stand to profit. Where can you find the FMV? Try a company-sponsored tool like Solium Shareworks or Carta.

But this is just the beginning of your sleuthing. You want to validate that your ownership percentage is accurate and understand how your offer stacks up to other companies. We know who can help you. (Hint: It starts with ‘vest’ and ends with “ed,” as in education.) Our database shows you how ‘fair’ your offer is depending on your role and the stage of your company. For example, you might find out that the average percent ownership for a VP of Product for a Series C company is .002% and you’re only at .001%. It’s good to know your options, so to speak.

Watered down stock?

As more people get hired, the pool gets refreshed as new options or shares are created and that causes dilution.

Dilution happens because each owner then owns a smaller percentage of the pie (and each share is worth less). This is inevitable as new investors get onboard, so don’t get too fixated on your ownership percentage.

Sure you own a smaller percentage, but it’s a smaller percentage of a more valuable thing. That’s the trade everyone makes.

You can still stack up even if you didn't stock up

OK, so now you’ve done your research and you find — gasp — that your equity percentage is below our benchmarks. Don’t panic just yet. There are a few things to consider if this is the case.

Do they offer performance-based equity grants?
This is a way for companies to provide further incentive for employees to meet company goals. Usually these grants are contingent on you adding value in some way to the company. For example, you come up with a new product feature or you rank in the top 10% of performers or you beat 50% of your deadlines, and in exchange, you get additional options or shares.

Do they give you more salary to compensate?
Some startups will bump up your salary if they are unable to offer something competitively attractive for equity ownership. This is important to consider as most employees actually leave after two years (when they would likely only be 50% vested). You want to think about how much money you need now and how much you believe in the company. (Keep in mind that venture capitalists (VCs) invest in 100 companies to make it big on one or two.)

Do they reward you for staying longer?
The average tenure at startups is two years. Part of the lure of hanging on is that you get more vested as you go. Yet some companies realize that after you’re fully vested (typically four years), you might lose motivation because you aren’t earning any new equity. The dangling carrot? Offering additional options in year 3 or 4.

There are options before IPO or acquisition (pun intended)

Contrary to popular opinion, you don’t need to wait for your company to IPO (Initial Public Offering, essentially when it goes public) or be acquired to cash in on your options.

Sell your options to outside investors
Companies are staying private for longer than they ever have. There’s now more access to capital than 10 or 15 years ago, so they don’t need to resort to going public to keep themselves well funded. And now outside investors are angling to get in on the growth of these private companies. One way to do it? Buy employee shares.

There are a number of platforms, such as EquityZen or SharesPost, that match accredited investors with employees looking to sell their shares. And you can do this whenever you have some, or all, of your shares vested. Simply let them know how many you want to sell and your desired price and they will try to make magic happen.

It’s tricky, though. Investors are cautious because information is harder to come by for private companies. They can’t easily figure out the value of the company and the shares can’t simply be traded on the stock exchange. Plus, private companies have rules about who can buy the shares, and how and when they can do it.

Get a loan from outside investors
The other way investors can get exposure to stocks at private companies is by making loans to employees like you so that you actually have the money to convert your options to shares. So what’s in it for them? The chance to get paid back when your company goes public or gets acquired. And, you guessed it, to get paid back more. Because they receive the principle that they loaned you plus some percentage of the profit.

Is it worth it? Let me work it

Things that affect the value of your options and when you buy them:

  • The type of options
  • What the company is valued at / will be valued at
  • How long you work there
  • Whether the company IPOs, gets acquired or crashes and burns

There are NSOs, or Non-Statutory Stock Options, and ISOs, or Incentive Stock Options, and the primary difference is taxes. For NSOs, you pay ordinary income tax on your bargain element — the difference between your strike price and the current share price — when you buy your options. For ISOs, the taxes might be seen as more favorable because you don’t pay this ordinary income tax when you exercise. However, something called Alternative Minimum Tax (AMT) is often triggered when you exercise ISOs and you need to make a payment similar to what you would with an NSO anyway.

Regardless if you have ISOs or NSOs, you will have to pay tax when you sell your shares, assuming, of course, that you make a profit. If you keep your shares for at least one year after exercising your options and two years after the grant date (e.g., your start date), your profits will be taxed as long-term capital gains, ranging from 0 to 23.8% depending on your income. If you don’t wait that long, you pay short-term gains, taxed as ordinary income, ranging from 10 to 37%.

There are different types of loans, so be aware of what you’re getting into. A recourse loan means that you need to pay it back whether or not the company actually goes public or gets acquired. Non-recourse loans do not have to be repaid if the company goes belly up — if the shares are worthless, you owe nothing.

How do you get connected with this kind of loan? Try a provider like Quid or ESO Fund.

Does selling shares make you a sell out?

Many employees wonder this. You might be leary of even mentioning for fear of looking like you don’t believe in the company anymore. But secondary stock transactions are actually quite common. Your management team understands that people have different needs — maybe you’re remodeling your kitchen, trying to pay for a Master’s or buy a car. Selling some of your shares to reach your goals might be right for you.

Will the company know?

Yes. And that’s because private companies almost always have a right of first refusal when an employee wants to sell shares. Which means if you find a qualified buyer for your shares, your company will likely have the right to refuse that offer and match it themselves instead. This allows private companies to better control who is at the capitalization table.

We're working on adding new companies to Vested.

Let us know which should be next:

Vested, Inc. ("Vested"), a Securities and Exchange Commission (SEC) registered investment adviser (RIA), offers a software-based financial advice engine that delivers automated financial planning tools to help users achieve better outcomes. Registration as an RIA does not imply a certain level of skill or training and does not constitute an endorsement of the firm by the Commission. A copy of Vested’s current written disclosure brochure filed with the SEC which discusses among other things, Vested’s business practices, services and fees, is available here.

You can view our Client Relationship Summary here.

By using this website, you understand the information being presented is provided for informational and educational purposes only and agree to our Terms of Use and Privacy Policy . Vested, Inc. ("Vested") relies on information from various sources believed to be reliable, including clients and third parties, but cannot guarantee the accuracy and completeness of that information. Under no circumstances should any information or materials presented on this website be used or construed as an offer, recommendation, or solicitation to buy or sell any security, financial instruments, investments or other advisory services or to otherwise participate in any investment strategy or product in any jurisdiction. Additionally, Vested or its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisors.

All company data, including but not limited to valuation, projections, and common share price, are estimates derived using public data sets without any endorsement or influence from the company and should be used only for informational and educational purposes. This data should not be used as investment advice.

Company logos are provided by Clearbit. All company names, logos, and brands that appear on this website are property of their respective owners. All company, product and service names and logos used in this website are for identification and informational purposes only. Use of these names, logos, and brands does not imply endorsement.