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Stock options are often used as a means for startups to attract talent and for individual employees to claim some of the value created by those companies. Therefore, it is increasingly common for compensation offers to include both a base salary -- usually less than what established firms pay -- along with stock options.
Unfortunately, unlike base salaries, there is little market data about typical stock option packages for different positions. So what can you do to ensure you have a good deal? Here are six tips:
1. Don't Forget Basic Negotiating
Realize that while negotiating stock option offers can be difficult, they should be approached with the same strategies and care that you use to negotiate any other deal. Focus on your interests, think creatively and make sure that you can justify any offer you accept as reasonable and appropriate given what others of similar skills make in the market.
2. Learn from Your Network
Because there is so little available data, coming up with useful formulas or benchmarks is very difficult. So instead of relying on the Web, use your personal contacts. If you know attorneys, venture capitalists, accountants or journalists who are familiar with your industry, chances are they know typical compensation packages. As a general rule, the top employees of a company, especially the CEO, are typically offered significantly higher percentages of the company (perhaps 2% to 4% for the most valued officers, and maybe up to 10% for CEOs). VPs can expect somewhat less (0.5% to 2%), and everyone else gets even less.
3. Understand the Value
While all options have some potential value, their value to you depends on a series of factors. Some of these factors have to do with the terms of the option, and are therefore negotiable. These negotiable factors include the vesting schedule of the option, restrictions on exercising the options once they have vested and the strike (or exercise) price. Typically, stock option packages fully vest after four years and a certain percentage vest every 12 months.
Non-negotiable factors have to do with the value of the company -- such as the company's most recent valuation, whether that valuation has increased in recent financings, how close it is to going public, the quality of its investors and the value of its underlying technology.
4. Know What You're Giving Up
Ask someone to help you value the options so that you can compare them to salary you are forgoing. Remember that stock options do not pay your bills or feed your family. Since you are often asked to forgo hard cash for them, you really need to figure out if this is a reasonable trade-off for you -- given your appetite for risk and your financial situation. The CFO, HR directors and any executive recruiters you are using can be quite helpful in these deliberations. Do not hesitate to ask them to help you understand the value of the offer. Generally speaking, while you will likely receive more options if you are hired before the company attracts venture capital funding, your options are worth more the closer the company is to going public.
5. Consider the Job Itself
Putting aside the lure of stock options, ask yourself how well this job will satisfy your other interests? If the stock turns out to be worthless, will you still gain valuable experience, make a reasonable amount and receive the benefits that matter to you? Since most companies do not strike it big, most employees do not get wealthy from their options. They are an important piece of your compensation, but in most cases should not be the most important piece.
6. Think Creatively
If you disagree about the stock options offered to you, think of creative ways to bridge the differences. If the numbers being offered feel too low, you can always look for ways to receive more based on performance, tenure or other factors. (Think of a bonus paid in stock options, not cash.) If the terms of the stock options upset you, consider a provision that automatically changes the offensive term once you achieve a certain milestone -- title, tenure or performance-related achievement.
