Author Topic: Employee stock options  (Read 7033 times)

A440

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Employee stock options
« on: April 04, 2013, 01:12:41 PM »
My husband is being offered stock options at his work.  I have a hard time understanding how this works, especially as he works at a privately held company.   

He definitely thinks the company is doing well, but how can we decide whether this will be a good deal for us?  My husband's thought is that the long term for the company is that it will be acquired by another company, and not that it would become publicly traded.

My google searches thus far have not been very revealing.

Cecil

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Re: Employee stock options
« Reply #1 on: April 04, 2013, 01:39:05 PM »
In general, they won't be worth much. Maybe low 5 figures unless either they have a billion-dollar exit, or he's one of the first 10 employees.

Is he getting options or vested shares? Either way, figure out what percentage of the company his shares represent, then multiply by the probable value of the company to determine how much they are worth.

KingCoin

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Re: Employee stock options
« Reply #2 on: April 04, 2013, 03:50:52 PM »
They could be worth either a tremendous amount or very little. Totally depends on the specifics.

What are the terms of the options?

Are they a default part of a compensation package or do you have to opt-in in-lieu of cash payment or buy them outright?

A440

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Re: Employee stock options
« Reply #3 on: April 04, 2013, 08:23:05 PM »
His paperwork states this is a stock option grant.  The type of option is ISO (Incentive Stock Option).  It says the exercise price is agreed to be at least 100% of the fair market value per share on the date of the grant (or 110% if certain conditions apply, and it references a section of plan document I can't find).    Does this mean he would at least get his money back, as long as the company is not bankrupt or something?

There is a vesting schedule over 4 years. 

It seems very confusing to me because I don't understand how one would value the company when it is not publicly traded, and it seems like they can just make more shares all the time. 

The cost of the stock if we bought it with the options we have now would be about $10,000 over 2 years, and it seems that the amount of shares goes up yearly.
« Last Edit: April 04, 2013, 08:25:26 PM by A440 »

GreenGuava

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Re: Employee stock options
« Reply #4 on: April 04, 2013, 08:26:23 PM »
Several of my friends were given stock in a privately-held company as part of their compensation.  This is how their bonuses were given at work (they were employed by said company), at least for a while.  Then the company decided not go public and bought back all the stock -- at far less than my friends had estimated, plus the entire "sale" had to happen at once (how this worked for their taxes, I never cared to find out).

My feeling:  don't pay for stock in a company that isn't public (it would be the extreme opposite of my investing philosophy for so many reasons), and if you are considering working for one that will pay you in part though these means, only do so if you are satisfied with the entire compensation package assuming the stock is worthless or nearly so.

iamlindoro

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Re: Employee stock options
« Reply #5 on: April 04, 2013, 08:57:34 PM »
His paperwork states this is a stock option grant.  The type of option is ISO (Incentive Stock Option).  It says the exercise price is agreed to be at least 100% of the fair market value per share on the date of the grant (or 110% if certain conditions apply, and it references a section of plan document I can't find).    Does this mean he would at least get his money back, as long as the company is not bankrupt or something?

There is a vesting schedule over 4 years. 

It seems very confusing to me because I don't understand how one would value the company when it is not publicly traded, and it seems like they can just make more shares all the time. 

The cost of the stock if we bought it with the options we have now would be about $10,000 over 2 years, and it seems that the amount of shares goes up yearly.

Remember, they are stock *options*, not stock itself.  They are an option to buy a number of shares at a fixed price.  You don't have to *exercise* those options up front, nor do you have to exercise them as they vest.  You can safely allow them to vest, paying nothing, and they continue to do so at no cost to you, until such time as exercising them makes financial sense to you.  Commonly, you will have five years after full vesting if still employed with the company, or 90 days after separation, to exercise any vested options. 

So, there are two conditions under which you might choose to actually exercise them-- The company goes public, and now you can exercise your, say, $1.00 options and sell them at market value for some greater amount.  Or, you are firmly convinced that in some time over 12 months, the shares will have great value.  Under that condition ISOs can be exercised and held for over 12 months and pay much smaller capital gains (this is the primary advantage of an ISO over an NSO).

Basically, what I'm telling you is this isn't a decision you need to make now, or even any time soon with the (standard) four year vesting.  All those options will still be there four years from now.

iamlindoro

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Re: Employee stock options
« Reply #6 on: April 04, 2013, 09:01:17 PM »
BTW, the valuation can come from a few different places, but most commonly in a non-public company there is an independent valuation based on any assets, IP, the market potential of the company, etc.  It comes down to "what were we last able to sell shares for to our investors."

As others have said, there is no guarantee of any kind that you would get your money back if you exercise options.  If you buy them, you're now a shareholder, and like any shareholder, you are capable of losing some or all of your investment.

John74

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Re: Employee stock options
« Reply #7 on: April 04, 2013, 09:02:50 PM »
The best thing to do IMO is to not exercise the options until you know for sure that they are in the money (meaning you can sell them for more than the exercise price). Until then keep those options tucked away.

FWIW, my wife and I have been granted stock options in private companies on several occasions and they all ended up being worthless. Some people who exercised too early lost it all.

A440

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Re: Employee stock options
« Reply #8 on: April 04, 2013, 09:04:16 PM »
My bias is against buying this stock, but my husband thinks the company is great, and it's a hot industry.  But this will definitely give him some good questions to ask.  I find the plan documents very confusing, and I feel like I am a reasonably financially aware person--do my own taxes including schedule C and forms for backdoor Roth, set up a solo 401k, etc; but I really don't get all of this.   It seems like there are a lot of potential down-sides.

But, my husband does like his job, and assuming he gets the raise that seems to be in the pipeline this year, he is overall okay with the compensation.

KingCoin, I hope I answered your questions--he does have to opt-in but doesn't have to pay any money right now.  They are not giving him any shares, at least right now.

Cecil, I am not sure how to value the company.  But my husband could probably ask someone about that.  He's not one of the first employees.  There are a few hundred now, I think.

iamlindoro, thanks for clarifying that we don't have to buy anything right now.  It just seems like they want him to sign stuff and return it, but it seems to be more like, "I am aware that I have stock options," and not committing to anything.

Thanks for all the help!

iamlindoro

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Re: Employee stock options
« Reply #9 on: April 04, 2013, 09:09:34 PM »
iamlindoro, thanks for clarifying that we don't have to buy anything right now.  It just seems like they want him to sign stuff and return it, but it seems to be more like, "I am aware that I have stock options," and not committing to anything.

Thanks for all the help!

Exactly-- He is accepting the terms of his option grant, and the schedule of vesting.  The one thing to consider now is whether to push for a larger set of options-- now is the time to do it, as you would negotiate any compensation as (whether they end up with great value or not) options are indeed part of the compensation.  Given the vesting schedule, it likely is a very standard option grant.

Like John above, I have had some options bear fruit, and others not.  I have never paid for them along the way.  In a merger/acquisition my experience (and that of my friends) has been that the transaction is transparent and that you simply buy/sell the shares to the acquirer as part of that transaction, and walk away with the check.

KingCoin

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Re: Employee stock options
« Reply #10 on: April 05, 2013, 07:15:59 AM »
His paperwork states this is a stock option grant.  The type of option is ISO (Incentive Stock Option).  It says the exercise price is agreed to be at least 100% of the fair market value per share on the date of the grant (or 110% if certain conditions apply, and it references a section of plan document I can't find).    Does this mean he would at least get his money back, as long as the company is not bankrupt or something?

There is a vesting schedule over 4 years. 

It seems very confusing to me because I don't understand how one would value the company when it is not publicly traded, and it seems like they can just make more shares all the time. 

The cost of the stock if we bought it with the options we have now would be about $10,000 over 2 years, and it seems that the amount of shares goes up yearly.

So it sounds like you're being given the options for "free", as part of a compensation package. This eliminates the need for any handwringing about whether or not this is a "good deal". Because the options are "free", you can't really lose any money in the traditional sense, though the value of the options will rise and fall with the fortunes of the company.

Somewhere in the option grant, you'll be able to back out the company's valuation. For instance, if the options give you the right to buy 100 shares for $20,000, and the strike price is the current valuation, and the company has 100,000 shares outstanding, you know that the company is being valued at $20 million (100,000/100*$20,000). If the company is eventually sold for $60 million, your options will be worth $40,000 (you exercise your right to buy shares at $20k, and sell them to the acquiring company at $60k).


pac_NW

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Re: Employee stock options
« Reply #11 on: April 05, 2013, 06:21:38 PM »
Great book for your situation. Kaye's wife is my CPA. They know what they are doing.

http://www.amazon.com/Consider-Your-Options-Equity-Compensation/dp/0979224896


Spork

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Re: Employee stock options
« Reply #12 on: April 05, 2013, 06:55:24 PM »
The best thing to do IMO is to not exercise the options until you know for sure that they are in the money (meaning you can sell them for more than the exercise price). Until then keep those options tucked away.

FWIW, my wife and I have been granted stock options in private companies on several occasions and they all ended up being worthless. Some people who exercised too early lost it all.

Exactly this.  I've received a handful of stock options in a really large public company that would appear to be worth "a whole lot."  They never reached a positive trade before they expired.  (In fact, there was a 10x decrease in price back in the tech bubble pop.)  I am pretty sure they were designed to make employees feel good and never to pay off.

A440

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Re: Employee stock options
« Reply #13 on: April 07, 2013, 08:43:03 PM »
Thanks for all the input.

I will have to look again through the information, because I didn't see anything about how many shares are outstanding.  Since we don't have to make any decisions now, we will just see how things go over the next few years.  Although it's not a start-up, it is still rapidly growing and changing, so much could change in the next few years.

yolfer

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Re: Employee stock options
« Reply #14 on: April 08, 2013, 12:43:20 PM »
Stock options are a lottery ticket. They might be worth millions, there's a better chance they'll be worth a few bucks, and there's a good chance they'll be worth next to nothing.

Of course your husband is bullish on the company or he wouldn't have taken a job there. But the odds aren't in his favor. My memory is not the best, but I think only 1 out of 20 tech startups have liquidity events.

Here's an interesting article on how to wrap your mind around startup stock options: http://michaelochurch.wordpress.com/2012/07/08/dont-waste-your-time-in-crappy-startup-jobs/

(Ignore the title, it's just linkbait)

The real value of working at a startup is learning a lot of things you wouldn't get to learn as just another cog in the machine at a larger company. The skills your husband will learn can be parlayed into future success, which will be worth way more than stock options!

A440

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Re: Employee stock options
« Reply #15 on: April 10, 2013, 02:51:04 PM »
My husband is definitely an optimist about a lot of things.  The company is involved in "green" energy, so probably at least some of its success may be related to future energy policy, which they can't control.   But, I think the idea of the business is to get green energy to become more competitive cost-wise with less green energy.   

Thanks for the link.  I will check it out.

yolfer

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Re: Employee stock options
« Reply #16 on: April 10, 2013, 04:14:00 PM »
My husband is definitely an optimist about a lot of things.  The company is involved in "green" energy, so probably at least some of its success may be related to future energy policy, which they can't control.   But, I think the idea of the business is to get green energy to become more competitive cost-wise with less green energy.   

Thanks for the link.  I will check it out.

Sounds like a great business! Nothing wrong with being an optimist. MMM writes about that pretty frequently: http://www.mrmoneymustache.com/2012/10/03/the-practical-benefits-of-outrageous-optimism/

In fact it's very useful in a startup (I'm an optimist at a startup too).