December 28, 2000, 9:26 AM — Say, friend, instead of that bird in your hand, how about those birds in the bush? No? What if we told you that the price of fowl is about to soar?
If the birds in the bush sound more attractive than the one in your mitt, you might be tempted to join a company that waves stock options beneath your nose. The company will save cash by paying you less up front (often 20 percent less); you'll share in the big bucks later -- if it hits the jackpot.
When it comes to stock options, what can you ask for? Salary negotiations are simple by comparison. But if your compensation mix includes stock options, what's a fair shake?
| And Remember... "October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." -Mark Twain |
Options are given to employees as a one-time or annual grant usually based on a percentage of pay or a merit formula. All options have two common elements:
Striking (or exercise) price. An option gives the holder the right to buy a specified number of shares at a specified price. The striking price is usually fixed as the price of the stock on the date of the grant, the dollar-per-share figure that must be paid. If shares of XYZ trade at $50, and you have the right to buy shares at $20, the option when exercised is worth a taxable $30, the value of the "spread." If the shares trade at $19.99, however, your options are worth bupkis. If the company's stock is not traded ("pre-IPO," as the venture cap guys say), no one knows the value of your options until the company stock goes public (if it ever does), and the striking price can be arbitrary, a total shot in the dark when it comes to valuation.
Vesting schedule. Option grants are always tied to the calendar. You may be promised 10,000 options, but perhaps only 3,000 will be yours at the end of a year, 6,000 at the end of two and the rest after three. Options granted annually as merit incentives may not be exercisable for a considerable period after the grant. Options granted when a company is pre-IPO may not be exercisable until many years after the company goes public.
Since the permutations between time and price are unlimited, Valerie Fontaine, a founding partner of Seltzer Fontaine Beckwith, a Los Angeles-based legal search consulting company, suggests: "Vest ASAP. Employers naturally want to spread option grants over time because it buys longevity and loyalty." Fontaine adds, "Four years to 100 percent vesting was once the standard, but we're now seeing three years to vesting as the norm, with more and more deals cut for one year or two. We're even seeing some immediate vesting."
When it comes to evaluating an options deal, remember that a company in the third venture capital round is a better bet than one in the first. Weigh the track record of the backers. If the money guys have never nurtured an IPO, the options component of your compensation may never fly.
Finally, since this is money we're talking about, crunch numbers. Dermot Bolger, president of Thinkpath, a Waltham, Mass.-based IT professional placement organization, notes, "Options will change the lives of only the top 10 percent of employees. The rest of us might realistically get $10,000 to $20,000 per year for a period of three years if the company goes public." Bolger points out that 15 percent (or 10 percent in Europe) of a companyy is the standard amount of equity held back for employees and that "half of that might be split among 10 top executives." So for those in the executive suite -- and why not CIOs? -- look for options in the neighborhood of an equity share between .5 percent and 1.5 percent of the company. That's a nice neighborhood, one where you can just go out and buy a bird instead of beating around the bush.
