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
Hey, 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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