Opting for negotiation and understanding

By Esther Chapman, InfoWorld |  Career

YOU'RE IN THE final stages of joining a hot new high-tech company as CTO. It's down
to cash and options. You can handle the negotiations about salary and perks. That's
straightforward. But what is that stock option agreement really saying?

Between the lines of boilerplate and legal mumbo jumbo, it's difficult to see how
this stock option agreement will play out in the long term. What exactly is vesting?
Who sets the exercise price? How do you exercise those options? And what exactly is
negotiable?

To answer those questions, we had three experts evaluate a sample stock option
agreement. James Dunn is a partner with Ernst & Young, a consultancy firm in
Washington, specializing in equity-based compensation for early-stage companies.
Gabriel Fenton is an options expert with PaineWebber in San Francisco and co-author of
the book Employee Stock Options: A Strategic Planning Guide for the 21st Century
Optionaire. Debra Mayfield is an attorney with Shapiro, Israel & Weiner, in Boston,
and handles employment, intellectual property, and information technology matters.


Gather the goods

Step one on your stock option journey is to gather the key documents, say our
expert panelists. Elementary as it may seem, many executives fail to see how various
plan documents impact each other. By neglecting even one, you may be setting yourself
up for problems down the exercise line.

What are and who has those key documents? The documents include the Equity
Incentive Plan, the Grant Letter, the Stock Option Agreement, and the Notice of
Exercise, all of which should be provided to you when the employment offer is made. A
word of start-up caution: Early-stage companies often do not have a plan in place. If
that's the case, ask for a proposed plan draft.

Other helpful resources include the Stockholder's Agreement and the Company Bylaws,
which executives often must sign as a condition of employment. These documents might
include terms that could limit your ability to sell shares or require you to sell under
certain circumstances that you may not have control over and that you may find less
than ideal.

Terms that affect your subsequent cash flow and option wealth include rights of
first refusal, which give the company rights to buy back your shares before you sell
them to a third party; cross purchase provisions, which are your rightss to purchase
stock in subsidiaries of the employing company; and other rights of repurchase.

Access to the Stockholder Agreement or Company Bylaws doesn't mean you'll be able
to alter their terms, attorney Mayfield says. "In some cases, you can negotiate your
employment agreement to help neutralize the effects -- for example, by changing the
conditions for termination."

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