Opting for negotiation and understanding

By Esther Chapman, InfoWorld |  Career

When negotiating with a privately held company, get your hands on a copy of the
most recent business plan. "After all, not every emerging technology company results in
a successful IPO," Mayfield says. Analyzing the business plan may give you insight as
to whether your potential new employer has a shot at going public.

If you're negotiating for stock options, don't assume you cannot review the
business plan and other key documents, Mayfield says. "In negotiating an employment
offer that involves stock or options or any other securities, executives are entitled
to request the same types of information provided to other purchasers and offerees of
unregistered securities," the attorney says. In other words, insist upon access to that
information.

Armed with the relevant documents, you can get down to the nitty-gritty of
evaluating the stock option agreement. Here's what our experts say about sections of
the sample agreement we provided them. Terms from the plan are denoted in italics.

Term 1: Share quantity and price

This is the bragging rights term: how many shares and at what price. Our sample
Stock Option Agreement offers the potential employee options on 100,000 shares at the
exercise price of $10 each.

"The number of options is the most important item in the document, and the most
negotiable," Ernst & Young's Dunn says. "You should think in terms of the percent
of the company that the number of options represents. Ask about the total number of
shares outstanding so you know what percent of the company you're getting."

Dilution is the word to watch for: The more stocks or options a company issues, the
more your ownership interest is diluted. To guard against this, you might focus on
negotiating for a fixed percentage of the company rather than the number of options.
The company would then have to increase your number of stocks or options every time
dilution occurs, Mayfield says.

It's not unusual for start-ups to offer NSOs (nonstatutory stock options) -- which
trigger taxable events -- without a Stock Option Agreement in place. Instead, your
Employment Agreement may refer to the company's intention to create a plan and outline
what those terms would be. It's a show of good faith on their part, but there's no
guarantee they will ever "show you the money," according to Mayfield.

Negotiation point: If you face that situation, Mayfield suggests negotiating
a clause into your contract that provides for monetary compensation in case a Stock
Option Plan never materializes.

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