Question

Part of the compensation in my job offer will be in stock options. The company is a start-up a few years old that’s backed by private equity. I know this might seem crazy — joining a start-up in this economy. But I’ve made my decision. The company appears to be in a solid position to grow in the coming years. What I need your help on is this: How can I equate stock with straight salary? What kinds of things should I consider when factoring in the stock options to determine if this is the right way to go? Thanks.

Nick’s Reply

stock optionsHey, I don’t knock start-ups. As long as you’ve made your own judgment, and have done it carefully, the decision is yours. So let’s focus on your questions.

Stock options as pay

The best analysis of start-ups and “stock as compensation” that I’ve seen is in Sizing Up A Start-Up by Daniel Rippy, an oldie-but-goody you can buy used. Rippy’s book will be very helpful. But the important point is that you’re “throwing in” with the company. You’re accepting the risk that part of your pay is riding on the company’s success (and on the honesty of the investors and the management team).

What does it mean to accept stock?

Welcome to the lottery!

You can’t equate stock with salary. That’s why start-ups often assign significant blocks of stock to newcomers like you — the value is totally uncertain, and it can take a lot of iffy shares to make up for real dollars in salary.

Now, if that sounds anti-entrepreneurial to you, I don’t mean it to be. Start-up businesses are the economic backbone of our country’s future. I’m all for taking risks. But don’t lull yourself into accepting a job offer because of the stock.

Make sure you’re happy with the job and the income you’ll be earning. Consider the stock your lottery ticket. If you get rich, great. But don’t count on it. Even if you really believe in the company, remember that the value of stock at IPO time is determined by factors that are largely out of your (and the company’s) control: investors including private equity and venture capital firms, the economy, stock market psychology, competition, the weather, which side of the bed the chairman of the Federal Reserve woke up on, and so on.

2 tests for stock options

I’ll offer you two thinking exercises to help you figure out for yourself how to view stock options in your job offer.

First is a test that was suggested to me long ago by the CEO of a start-up. If you were not considering a job there, but this start-up’s stock were in fact available to purchase on the open market, would you buy some at the strike price today? (The strike price is how much you’d pay per share when your stock options are fully vested.) It’s an interesting question that forces us to realize that, if we’re considering stock options as part of salary, to accept those options is to make an investment in the company. Do you believe in the company enough to be an investor?

75% of start-ups fail

The second test forces us to eliminate the stock options from our calculation, as if the options will be worthless. While you could get rich from stock options, consider that, depending on the survey, 65%-75% of venture-funded start-ups fail.

You’ll know the company and the job are right for you if you’d take the job at the salary offered without stock. This helps us see stock more clearly as a reward and a bonus, and the salary as pay for our work. You can spend salary now. You cannot spend stock options.

Do you want to be an employee or an investor?

But don’t think only like an investor. Think like an employee. That company might fail and your stock options might be worthless, but you could win big. Between a good salary and the opportunity to develop your skills working in an innovative, leading-edge business where you get a chance to do work not offered elsewhere — this job might be perfect for you.

If you need help negotiating your job offer, please see Fearless Job Hunting, Book 9: Be The Master of Job Offers.

I believe the bottom line is that you can’t equate stock with salary. My advice is to decide whether you want to be an employee or an investor in this start-up company. You can be both, but don’t confuse stock options with salary. You’ll know the offer is right if you’re willing to accept the salary and put the stock in a drawer and forget about it for now.

Apply those two tests to this opportunity and be brutally honest with yourself about what motivates you.

Would you accept less salary in a job offer if it included stock options? Did you ever receive stock options as part of a job offer? How did it factor into your decision? Have you ever profited from stock options you got in an offer?

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34 Comments
  1. “Would you accept less salary in a job offer if it included stock options”? For real? No, I wouldn’t.
    That’s like asking if you’d accept confederate money or monopoly game money in a job offer too?
    I’d accept a fair and prevailing wage and competitive benefits commensurate with my experience and skills I’d bring to the table, and from a reputable and established employer to boot, nothing more, nothing less. I’d also steer clear of sketchy so called start up companies. Those places are like throwing yourself on your sword.
    Gimmicks and scams are just that, gimmicks and scams. [REDACTED]

    [NOTE FROM NICK: Insults are not acceptable. Other users have complained. You have been warned more than once and will not be warned again.]

    • Start ups are RISKY. Accept enhanced salary and all the perks you can think of, including a sign-on bonus UP FRONT. After all, the start up is risky and actually your skills / experience is therefore even more valuable to the owners. The “lower salary” because we are a start up is …. a fraud. The owners are not taking a lower salary – yes they pretend to but not actually. One example – I worked for a start up franchise computer training company at such a salary; the two owners claimed that they were not taking a penny in salary. The Secretary became angry at being cheated and left the biweekly payroll sheet on the counter after work (so the night teachers could see it.) and they were taking (early 1970s) $4,000 per two week pay period. That was a lot more than their trainers were receiving. When confronted, they claimed it was not salary, it was “advances.” Their franchise company had a list of things to avid, one of which was be sure not to pay your employees “to much.”

      As to stock options per se: they should be at no cost at all to you, including the tax. The start up owners claimed it was in lieu of salary, right? MOST IMPORTANT: have it in writing, signed, witnessed, etc. that your PERCENT STOCK OWNERSHIP IN THE COMPANHY CAN NOT CHANGE WITH THE ISSUANCE OF ADDITIONAL STGOCK. ALL owners plan on issuing more stock to investors, even up to 80% of the company. What will your percentage of stock amount to when that happens. And it will happen. If the owners have any honesty they will admit it. It is your skills / experience that will make the company successful; owners can’t do it alone. YOU create the success, if there is to be success; YOU deserve to benefit!

      • @Wes: Am I missing something? I don’t see where the OP said “The start up owners claimed it was in lieu of salary, right?”

        I agree with you, if there is to be success, YOU deserve to benefit. Is this an award of stock, rather than an option to buy stock? You also point out another important issue: Can your stock be diluted? In most cases the answer to both is NO, but in the best case it’s YES.

        On the other hand, while there is often upside in a start-up (new skills, more responsibility, etc.) there is usually more downside, too. It is more risky. I don’t think anyone says there isn’t (e.g., Annette makes this point repeatedly). Stock of any kind is an undetermined bonus. As long as you go into the deal knowing that, I see no problem.

        I suppose it’s a matter of how sophisticated or naive the candidate is. It’s why I recommended Dan Rippy’s book.

        • The “option to buy” is a fraud because it is merely a pretense to get you to put your money into THEIR company up front.

          And, sorry to say this, but you are completely incorrect that your stock will not be diluted: for example, using easy numbers, if you get one share of stock out of, say, 100, you have 1 % equity. When the owners decide, definitely without your vote, definitely without your approval, and definitely without your knowledge, to issue additional shares, let’s say to a total of 1,000 shares, of your, as you say undiluted stock, is now 0.1 % of the outstanding shares. That has definitely diluted your 1 share of stock, hasn’t it?

  2. The only worthwhile test for stock is: is it a bonus or incentive, not the base for the compensation?

    If yes, and the company/product seems solid, go for it.

    If no (which 98% of the time means they’re trying to give you Monopoly money instead of real money), bail. Those companies pad *heavily* the number of failed startups.

    I had a company approach me with an offer last year. They lowballed me, and when I asked for more money they did point out the stock options I would be taking. The HR woman seemed to be a little miffed when I mentioned that yes, they were trying to go public, but there was no guarantee of that, was there (to which she agreed, definitely not enthusiastically). Ultimately that + some more digging into company culture had me back out of the offer since I wasn’t willing to jump into a powder keg.

    • @David: Never mistake the offer of stock options as a substitute for salary. That said, you might decide to accept options as a substitute for salary because you’re willing to take the risk. Just be aware and be honest with yourself. And good luck.

      On the other hand, start-ups that try to convince a skeptical job candidate that options will make up for lower salary are running a con, whether they admit/realize it or not. (Let’s face it, entrepreneurs frequently snow themselves as well as others.) No matter how much faith they have in their business, when they hire you they’re paying for your work. When they offer you stock options, they’re asking you to invest in their business. Two different choices that should be made clear to the candidate, and that a candidate has a responsibility to understand for themselves.

      Having said that, I love start-ups in general. I love investing, too. Eyes open!

  3. I was given 3500 options shares that would vest in 5 years. Didnt really care as I wanted to work for the company and 5 years was forever at that point
    Good thing I didn’t care as the stock kept going down,down, down and they were underwater after the first year. There were a lot of other great things about the company and I ended up working there for 13 years.

    • @Tom H: I’ll confess my own naivete. I joined a start-up company long ago after it went public. I was offered no stock. But the owners played a related game. Their stock was sucking air and the CEO apparently convinced the head of technology “it’s a good time to buy, let others know!” Well, I bit at the bait. Because it was thinly traded, our buys lifted the price for a bit. Shortly after, I unloaded mine at a loss. All the management involved sank with the company. Lesson learned.

      I still love start-ups, but I separate investment from payment for my work. In today’s economy, a good start-up that you vet carefully can likely provide what “the talent” really wants: remote work that pays well!

    • Don’t forget about dilution. If a startup keeps receiving funding, you’ll be paying for that funding when your options are diluted.

      If your startup gets to funding round ‘E,’ your options will be worthless.

  4. Was working for a startup with a viable product. Over $1b <- (yes that's correct) investment. SPAC IPO at $10. They've burned through all the money. Had warranty issues with some of the product. Stock under $1 now. Strike price for the options were around $8 to $10. Don't count options as part of your income.

  5. Consider the “fine print” of the options, such as what happens if the company is sold (while still privately owned) to another privately owned company.

  6. Good points in this article and the comments which I agree with. Of course, if the stock goes down and the company goes bum up, your salary won’t be worth much either. Would probably quickly be a non-salary.

    • @Rupert: I learned long ago that any company can go “bum up” and that any job can go south. Job security is not what it was long ago. I’m not pining for the past; just noting reality. Always be job hunting or start a side gig or start your own biz.

      And P.S., working for a good start-up can be a good tutorial in starting your own.

  7. For me stock options paid off in the end but what an emotional roller coaster watching stock price go up and down over the life of the options. The company was publicly traded so you knew exact value of of options at market close. Watching stock price became addictive.

    In the end I did well because the company sold and stock price was at a premium.. the down side was taxes on capital gains.

    For a true story on options I suggest watching We Crashed on Apple + . Shows how a megalomaniac used stock options as a means to bitter end for some trusting employees.

    • NEVER pay for the options. Demand as much stock as your salary or some multiple of that. The stock has ZERO value right now, but your skills / experience have infinite value right now. They are running a scam, just like annual reviews and promised onuses. Go for the here and now – that’s what your employer is doing with you, taking your here and now benefits to the company for a pretend future.

      • @Wes: It’s all a matter of tolerance for risk. You might as well be telling people not to buy lottery tickets. Some “go for the here and now,” some go for future payout. If not for the latter, there would be no capitalism or business as we know it. Are you suggesting investment is always a scam?

        • That’s not what I am saying. The stock “now” is actually worthless, it costs the company to award – at no cost to you – any amount of stock. That is why I say to demand as much as you can, say 10X salary. That costs the company exactly ZERO. This has NOTHING to don with risk. Only that you ask too little. With the stock worth nothing “now” why should you be expected to pay anything for it? The stock thus becomes a major motivation, a major incentive to you to produce and to stick around. Which brings up, accept no “conditions” “terms” or etc. about your stock ownership or you will not actually own it. Owners have all kinds of ploys (schemes) to deceive. I have experienced many of them; I know from sad experience. The more convincing, the more I was taken to the cleaners. BUT NEVER PAY FOR THE PRICVILEGE OF JUST GIVING THEM YOUR CASH FOR A FEW PRETTY PIECES OF PAPER.

  8. Completely agree that stock options should not be considered a replacement of salary – Nick is spot on with that observation. Would you take the job without the options is the real question.

    That said, it does seem other commenters are mostly negative about stock options. The flip side is, if you work your tail off in a company and the ownership value goes way up, do you want to participate in that or not? I know a woman in her early 40s who never has to work again (with a moderate lifestyle) because of her stock options in a company that went public.

    The point with a startup is making sure they are an element of what you receive. If you can’t handle the ups and downs that startups experience, then it’s probably not the right job for you in the first place.

    • You’re trying to argue the exception, rather than the rule. Many startups fail, and most of those that fail offer stock options. A failure means your stock is only worth the paper it’s printed on.

      • Again, so negative and missing my point. You probably should not take a job at a startup company.

        If you like the rest of the compensation and the company, then ensuring stock options are available gives you added benefit on the upside, with nothing lost on the downside.

        • “So negative” BULL. The employee should have stock equal to his value in skills / experience. I see no other comments on this issue. REMEMBER” the cost of the free stock to the start up is ZERO. ZERO. ZERO. THINK ABOUT THAT. The cost is an ABSOLUTR ZERO, so why would they haggle at all if you want 10X your salary in free stock? Be sure your benefits are top rate also – the owners are getting top flight benefits, medical, retirement, etc.

          • Again, if the risk profile is wrong for you, and it certainly sounds like it is, stay away from startups.

            For what it’s worth, jobs aren’t guaranteed with larger companies, either, and those are likely to come with more bureaucracy.

            I am a startup CEO and I do not make a lot more money than much of our senior team, nor do I get better benefits. I do have a good amount of equity that will pay off for the risk I’m taking as our company is now taking off.

            With your criticisms and insight, I hope you can start your own company and treat people the right way. That is far more effective in positively changing the world than angry words on a website.

            • Again, nobody but you is saying stay away from startups. The true issue is what to pay for them. Pay northing. The owners NEED YOU more than YOU need them. Realize that. Appreciate that, and you are in an excellent bargaining position. Ignore that and you stand to lose a fortune. Why in the world would you choose to pay for something you can get for free?

          • @Wes: You’re making an awful lot of assumptions and generalizations. And the cost to the company is not zero in the future. If there’s an IPO, that stock has cost the company some equity. I think you’re painting all situations with one color, and they’re just not. Again, it’s a matter of personal risk tolerance and assessment of the risk. Without this, there is no American economy, is there?

            • Nick, the company has zero cost to them “now.” You have tremendous profit to the owners “now.” You and others, make the company profitable. The free to you stock might pay off in the distant future; they are in the same position, in the distant future. As ypu said, “in the future” your stock might be considered as a cost in equity to the company, but isn’t that exactly what stock is, equity. The have equity for starting the company and you have equity for joining the company and investing your skills / experience into making that equity have some value “in the distant future.”

              I see the risk argument as a red herring. So what about risk? Joining any company is a risk, startups are, yes, more risky. Thus part of the reason that you receive stock, not options, but “grants.” Just like you “grant” them the use of your skills / experience, without which they might fail – this is their part of the risk.

      • @David: I agree with Annette. Your skepticism of start-ups is understandable. But if a start-up pays you a salary you’re happy with AND gives you stock options, what’s the downside? What’s wrong with taking the deal?

        If concern about company failure is the problem, then of course don’t do it, but that’s a different downside issue. As Annette notes, some people like the idea of owning a possible upside, like they enjoy buying lottery tickets. Tolerance of risk is a personal thing.

        I’d venture that even when joining established companies, most job seekers don’t vet them for likelihood of failure any more than they vet start-ups. Caveat emptor is not an empty motto.

        • The obvious downside is that they are asking either for cash investment up front or in lieu of salary. Either way, that is cash out of your pocket. You can be absolutely positive that your stock, whatever it is, does not deliver ANY MANAGEMENT PARTICIPATION AT ALL. The fact that they want to con you into providing additional investment funding for THEIR company is the proof. hink about it. Admit it.

          This is not “negativism.” That criticism is akin to the HR woman’s criticism of those who have wised up to what the true function is of HR – to screw the employee in all ways they can think of.

          • @Wes: Again, I don’t see what you’re basing your premise on. “they are asking either for cash investment up front or in lieu of salary”

            There’s no one asking for cash investment up front in any scenario we’re discussing, and the OP did not suggest the options are in lieu of cash. I asked if anyone would take options in lieu of stock, and that’s a personal judgment. I see no “con” in any of the scenarios we’re discussing. “Eyes open” and due diligence are of course in order, but doesn’t that sometimes lead to the conclusion that the stock options may be a good thing to have?

            “providing additional investment funding for THEIR company”

            Once you invest, it’s YOUR company, too, because you’re an owner by definition, even if you have no management status.

            I think you’re arguing something that’s clearly an emotional issue for you. But that doesn’t make stock options inherently good, bad or a “con” for everyone in every case. My point with this column is to consider the factors, not to decide yes or no because stock options are good or bad in themselves. Stock options can be incredibly good.

            • Nick, the stock option is an option to give them your case at some (specified) price. You do that now or at some distant time when the price, hopefully as to risk, is higher because of increased value. The end result: they want your cash. Surrendering your cash – no risk to them that your cash is not of value – and taking the unnecessary risk that the stock will be worthless is a risk you avoid by insisting, as I said above, that the stock be a “grant” without conditions. Are you placing “conditions” on them keeping your cash? Must they refund it if you are not with the company x years from now? Or any of many other “conditions?”

              Being an “owner” is completely meaningless if they control the direction of the company, it is their company, not yours unless you received 51% of the stock – unlikely.

              Yes, indeed, stock options can be incredibly good; they can be incredibly “good-er” if your cost is zero. And your risk will be zero (also “good-er”) as well. What I am saying is, get the stock at zero cost to you, participate in any equity appreciation that YOU produce.

              My “emotional issue” is why pay cash for something that you can get for free? Why allow yourself to be … (talked into the presumed prestige of being a “stockholder”? (I avoided saying conned into, didn’t I? OK, not I didn’t.)

  9. Well put. I’ve always followed making job comp judgements on the salary/benefits package alone. Meeting needs is a must, more than needed and by how much nice & nicer. I always considered options gravy. They been put on the table as an inducement to accept an offer or mentioned e.g. (see all those high priced cars in the parking lot….options)
    They’ve come up 3 times in my “illustrious” career. 1st via a possible internal promo/job..which I passed up. 2nd had them and they went under water & stayed there & 3rd when they paid off. But as noted by others, I never counted on them or factored them in. Never considered sweat equity.
    I never had it come up but if I had 2 offers pretty much the same, stock options might be a tie breaker.

  10. No one says that an employee gets hit with tax consequences depending on the timetable of receiving and exercising the stock options.

    I worked at a long-established significant Fortune 500 company that offered stock options as part of the benefits program. A stock options representative wasn’t thorough in his answers when I inquired about buying stock options, which I then had checked by an independent financial advisor who advised against them. He said to always check with a CPA before exercising the options.

    I realized that he was right – a year later, an employee of a well-known software company decided to sell his options after a year, based on the value of the company’s assets. Then, after getting hit an enormous tax bill of $400K, he freaked out – his salary was $150K.

  11. In general, you should always think of stock options as a bonus that you may or may not get anything from. You cannot count on getting a penny from them and they can actually cost you money. Also, stock options are very different for a pre-public company vs a public one (public one it’s just a very slight discount on the stock price as of the date the options were granted so whether you accept options is basically a decision about whether you want to own their stock). Be aware that many pre-public companies have some pretty shady practices around stock options (not commenting on any particular company specifically). Any of the following may and often do happen to folks:

    1) (not shady but risky) You leave the company (voluntarily or involuntarily) before the options are worth anything and you have to decide whether to risk the money and hope that it works out (in other words, stock options can cost you money)
    2) You are considered not a team player if you don’t take a substantial portion of your salary in stock options and it affects much of your experience at the company in a negative way, including getting lousy assignments and being the first laid off in layoffs
    3) You are laid off right before the options vest so you never see a single share of the stock (happened to me twice and to many others I know repeatedly; often enough to not be coincidental at least most of the time)
    4) You are asked to make additional salary sacrifices later for the good of the company in return for more and more stock options that become increasingly less likely to ever be worth anything

    And, a small percentage of the time, you get lucky and the stock options are worth more than the option price at the time you have to decide whether to buy them and you make some money. In a very small percentage of cases you can make a lot of money.

  12. Bob got it right above

    Dilution is how the financial wankers take all the money and leave the options as low grade bathroom tissue.

    Heres how it works. All those options suddenly go from your 1-5% to 0.1% when there is money to be cashed out. There is also a trick called preferred stock where the wankers who went to frat parties with the CEO get stock that’s paid off first. All options are equal, but some are more equal than others.

    I apologize for using ‘wanker’ twice in a professional forum. It seems to be a recurring problem whenever Finance or HR is discussed.

    • @VP Sales: I learned that the hard way. I joined an engineer to start a new company. I got a stock award from the start (not options). 25% of the company. When I learned the company’s cash was going up the engineer’s nose, I quit. I still had a stock certificate for 250,000 shares. A few weeks later he and his attorney diluted the stock to the point where my “shares” were worthless. Naivete quickly turned into savvy. Never found out whether he got his nose fixed, don’t care. I got over it. Lesson learned.

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