What are stock options worth in a job offer?

On November 12, 2018

In the November 13, 2018 Ask The Headhunter Newsletter a reader asks whether to accept stock options as part of a compensation package.

Question

stock optionsI’ve been with the same company for five years, with total 18 years’ experience. I’m considering an attractive offer from a year-old start-up financed by a very respected venture capital group. The offer includes stock options. The idea is that someday they’ll go public and will be hugely successful, or someone will buy the company, and we’ll all become rich (on paper).

My question is, how would I go about putting a value on the stock options offered? Understanding the risk I assume, what should I negotiate for? Any suggestions?

Nick’s Reply

Venture funding for start-ups by respected venture groups is slowly picking up after a lull of several years – and that’s a good sign for the economy. But don’t count any stock options before they hatch.

There are as many subtle variations on evaluating options as there are start-ups. You could do well, or you could wind up very disappointed.

I’ll offer you two simple rules of thumb. There is no finesse in this. It doesn’t even involve calculations; just a blunt point of view that I’ve developed as a headhunter during many years of dealing with people who’ve faced this situation. A very few have profited from options, but most haven’t.

Stock Options: Rule 1

The first rule is that the factors which influence a start-up company’s success or failure are unknown to you at this point, and you have virtually no control over them. More important, to varying degrees we can say the same about the founders of the company and those who are funding it.

  • Thus, any attempt you make to rationally analyze how much start-up stock to hold out for — or to estimate what that stock is really worth today or in the unknown future — is a crapshoot.

Stock Options: Rule 2

Here’s my second rule:

  • All stock options in start-ups are worthless by definition because you cannot put a value on something you cannot sell.

How to think about that job offer

Now for my advice, based on those two rules:

  • Accept the offer only if the work and the compensation package without the options would make you take the job.

How to negotiate the job offer

Negotiate for all the stock options you can get. But beware: A company is not likely to give you more options than it has already decided on. Management has thought about this more than you have, under the guidance of people who put up their cash to start the business. Unless you would be a key employee whose expertise would have a key impact on the company’s chances of success, you probably don’t have much leverage to negotiate options.

Now here’s the most important thing to take away from this discussion:

  • Negotiate harder for salary, bonus, incentives, commissions and allowances, and consider the stock options a lottery ticket.

This is what will keep you truly motivated day in and out. While I understand when a start-up’s founders say they want employees who are truly motivated to “throw in with us and take a risk,” you must decide how much of a risk you can afford to take — and whether you’re willing to give up part of your own market value today (cash compensation) for a chance to hit it big later.

Talk with a lawyer

No matter what they put in your job offer, a startup is a special situation because the risks are different from those in a mature company (even a small one). That’s why you should talk with a lawyer to get your job offer reviewed before you accept it.

These Ask The Headhunter PDF books will help you with the compensation end of a job offer:

Fearless Job Hunting, Book 6: The Interview – Be The Profitable Hire. This works even when discussing salary with your current employer.

Fearless Job Hunting, Book 7: Win The Salary Games (long before you negotiate an offer), especially “The Pool-Man Strategy: How to ask for more money,” pp. 13-15. Sometimes it helps to ask casually.

Fearless Job Hunting, Book 8: Play Hardball With Employers, especially “Due Diligence: Don’t take a job without it,” pp. 23-25. This is a must when considering a job at a start-up, though this section applies to established companies, too.

Fearless Job Hunting, Book 9: Be The Master of Job Offers, especially “Non-Compete: Did I really agree to that?”, pp. 5-7.

This article by my own attorney will highlight some of the issues you should consider: Employment Contracts: Everyone needs promise protection.

What’s your tolerance for risk?

Here is a sobering question to test your tolerance to risk in this situation:

  • If you had a chance to buy into this start-up without working there, would you buy its stock today?

If you wouldn’t invest in this start-up as a bystander, why would you take part of your pay in stock?

No matter how many options you get, if the company strikes it rich, I guarantee you’ll look back and think, “I knew I didn’t get enough options when I took this job!”

If the stock winds up worthless, you’ll be glad you were doing work you really wanted to do, and getting paid a nice package in the meantime.

Have you ever taken stock options as part of a job offer (with a start-up or otherwise)? How did it turn out? How did you negotiate the details? How would you advise this reader?

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Want a job? Threaten to start a business!

On October 12, 2015

In the October 13, 2015 Ask The Headhunter Newsletter, a reader wonders whether rejection in the jobs marketplace suggests it’s time to start a business instead.

Question

My husband and I have been in the software business for ten years. Paul was a crucial part of two successful start-ups. The products he developed won awards and were best-sellers, and as a result he was hired by an established company. (They hired me, too.) There, Paul started, designed and finished a small project for a client that was worth about 50,000 euro. Then he showed how his work could be turned into two products — the company’s first. The company was thrilled and so were the customers. The company netted 500,000 euro from his work. The rest has been history for us. Paul became the leader of our team and we have created many more successful products.

business-plan2Now Paul feels he has no room to grow and it is time to move on. The companies to which he has sent his C.V. [what Europeans call their resumes: Curriculum Vitae] are very impressed, but they say he has not managed huge enough projects or teams. He even got a call from a headhunter (his first!), but four weeks after the interview there has been no feedback.

Paul has proved again and again that he knows how to make a product that will sell, but he can’t sell himself. These companies have lost a chance to get a great software developer and businessman! Is there any hope? Should we keep trying to get the jobs we want, or start our own company?

Nick’s Reply

The answer is do both. Trying to start a company can lead to getting a job. I will explain how momentarily.

Paul is clearly talented, and I’m sure you are, too. I believe the problem that big companies have with his lack of experience with “big projects” and “big teams” is nonsense. Narrow-minded headhunters, personnel jockeys and managers miss out on great new hires when they confuse experience with talent. (See Pssst! Here’s where you should be recruiting top talent!)

Lots of people can conceive new products. Some can actually design them. But the rarest worker is one who can conceive and get a finished product out the door profitably and make customers happy. That’s talent. Interviewers often do not know what to do with unusual people like Paul. Investors, however, do.

You are both at a crucial point in your careers. You have proved what you can do. Now you need the infrastructure that will enable you to do bigger projects. If you compromise on that, you will hurt your careers and make yourselves miserable.

Here is my advice. Forget about pursuing jobs. If you want a great job, create your own business. I’m not suggesting this is easy, but it’s a path worth pursuing.

To start your own company, you will need to examine the market and the industry you want to specialize in. You will need to talk with many people, including prospective customers and distributors. You will need to talk to companies whose products will interact with yours, and with companies that produce related or competing products. (See the chapter titled “Scuttlebutt: Get the truth about private companies” in Fearless Job Hunting, Book 5: Get The Right Employer’s Full Attention.) All these contacts will guide your product development ideas and introduce you to the partners you will need. They will help you get funding, whether in the form of purchase orders or direct investment. (See Trading your job for venture funding.)

As part of your effort, you will produce a business plan. The plan is actually a substitute for a resume. It shows what you can do. However, unlike a resume, a business plan also shows how you will do it. That’s what gets a company’s attention and its investment. (See Stand Out: How to be the profitable hire.) In the course of talking with these companies, your meetings will be a substitute for traditional interviews. Companies will get to know you far better than they ever would in a job interview. Your business plan and these meetings will help you overcome objections to your lack of “big time experience.”

Some of your new contacts may help you start your business. Others will prefer to avoid competing with you — and they will recognize the opportunity to hire you and Paul. Stimulated by your business plan, they may offer you jobs.

The key is to introduce yourselves with a business plan instead of a resume, and with a business presentation instead of a job interview. That is how you will get past the “employers” so you can meet with the people in a company who worry about profit.

The traditional, small-minded hiring process of big companies doesn’t hurt just the job hunter. It also hurts the employer. Thus, your challenge is to avoid the hiring process. Your challenge is to get to the corporate-level executive (preferably a board member) whose job is to find new ways to make money, to find new products, to create new markets, and to develop new partnerships through investment. You cannot do that with a resume and a job interview.

Paul is a point on the productivity curve, but he is on the very narrow, leading edge of that curve. He is unusual. Few companies will know how to interpret his resume, how to interview him, or how to calculate his future value. He has great abilities. Don’t use those abilities to get a job. Threaten to start a company instead. He will get more attention — the right kind of attention. And he will either get funding, or win a great job.

job-offerWhich will be the outcome? I think it depends on too many factors to predict. The point is, you and Paul need to do the same things to achieve either goal.

For everyone else reading this, the message should be clear. Even if what you want is a job (and you don’t want to start a business), a smart way to do it is to develop a plan for a business and pitch it to the appropriate people — including competitors. (See Put a Free Sample in Your Resume.) I think it’s a sure way to a job offer, because a smart competitor will “buy you out” to avoid competition — by hiring you.

What’s the difference between job hunting and pitching a business idea? Is there really any?

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2 Rules About Working for Start-Ups

On July 20, 2015

In the July 21, 2015 Ask The Headhunter Newsletter, a reader is in a pickle — er, start-up — without a salary, and without protection on the upside or the downside.

Question

Your advice in the newsletters is brilliant. However, I haven’t seen you say much about start-ups. I’m in my 50s and enjoy the chaos of a new company. I have been doing it for nine months, and I love it. I am not getting paid, or receiving any benefits. The company has been getting exposure, and a few small projects, but no investment backing. That means no money. The CEO continues to tell the development team, the editors, and writers that “we are so close.”

bait-and-switchShe also mentioned they are moving to Silicon Valley, but will be using distributed-teams software to push more projects out.

The problem is that my budget and time are expanding. I am worried that my “job” will be lost by their move. I have only a handful of e-mails outlining the stock certificates, with promises of full-time employment when investors come through. However, I have nothing legal or tangible to suggest they are serious.

I’m ready to quit, but need some guidance. How do I approach her about my concerns without questioning her integrity? Should I suggest several options that have some legal teeth that protect me? So far I have all the risk while she continues to pump out projects. Thanks!

Nick’s Reply

There are two good reasons to work at a start-up:

Why work for a start-up?

One, you’re an owner with ironclad shares that cannot be diluted without your approval. If the company takes off, you’ll get your reward. If it doesn’t, you at least had a deal that protected your upside.

Two, you’re an employee being paid a fair (if not good) salary, and you’re expected to work hard over and above anything resembling “reasonable” — because you have some shares and stock options as a reward if the business takes off. Your salary protects your downside.

If you’re working at a start-up under other circumstances, I’m sorry to tell you that you’re probably a chump — unless you’re independently wealthy and love that kind of work.

I’ve got two rules for working at start-up companies.

Rule #1: Don’t get screwed

star-wars

I love start-ups. Been there, done that, had great experiences… except the time I got screwed because I had nothing in writing. When the founder decided to bring in other investors, my 250,000 shares were instantly diluted down to virtually nothing. (See Start-Up Stock: What’s it “sort of” worth?) The first rule when joining a start-up is don’t get screwed. Invest in legal and accounting advice to protect your up- and downside.

Let’s discuss how to handle your boss. You’re being naively nervous about offending a founder that you’re giving free work to. It’s time to make it legal.

I’d sit her down without any apologies and without hesitation in your voice.

How to Say It
“I’m excited about what we’re doing and I love the work. However, this is a business proposition — I’m working for free for equity and the promise of a full-time job. I think it’s time we put this in writing for our mutual protection.”

If she indicates any problem with that, then I think you’re being taken for a ride, and that you’ll be summarily dumped by the side of the road. She should be apologizing to you and extending every courtesy — you’ve been working for free with no written assurance of any reward!

You might want to talk with other “employees” to see how they feel — and to find out whether they have contracts. You all need them. You may want to speak with her as a group. But in my opinion this has already gone too far. You’d be pretty upset if she took advantage of all of you at this point — so don’t fret about having this discussion.

Rule #2: Don’t get screwed

Before you do that, I’d talk with an attorney. (See Employment Contracts: Everyone needs promise protection.) Equity deals and contracts with start-ups are complicated and fraught with risk. If it’s not worth the legal fee, then how can the promise of this job be worth anything? Please take this seriously.

The other issue is that if and when investors come in, your boss will have very little to say about your equity share. Investors don’t like seeing their shares diluted. You could wind up with very little, if anything, if you don’t have a solid contract now — and the right kind of shares.

I don’t mean to scare you, but I’ve seen this again and again. Even a well-intentioned founder can wind up hurting the team that poured its blood and sweat into the business. Working with no contract is totally imprudent and un-businesslike. I’d get to it asap. Did I caution you not to get screwed?

Don’t forget about IP (Intellectual Property) rights. Have you signed an NDA or NCA? Have you signed over any IP rights to anything you’ve developed? Your boss could be screwed, too, without these. It’s another reason you need a good employment lawyer.

Get compensated

My philosophy is, get value for value. Your work is valuable. Ask for salary, and ask for equity. I don’t think suggesting “several options that have some legal teeth” will help you unless you talk to a lawyer first. This is easy: Just tell her it’s time for a written, signed agreement — and stock certificates. Something tells me that’s when she’ll tell you you’re not part of the move — though I hope I’m wrong.

Before you quit, give your boss a chance to protect your investment in this business by compensating you fairly for the risk you’re taking. Get compensated. That’s not a rule; that’s good business. Do your best to prepare yourself in advance. These Ask The Headhunter PDF books will help you with your “boss”:

Fearless Job Hunting, Book 6: The Interview – Be The Profitable Hire. This works even when discussing salary with your current employer!

Fearless Job Hunting, Book 7: Win The Salary Games (long before you negotiate an offer), especially “The Pool-Man Strategy: How to ask for more money,” pp. 13-15. Sometimes it helps to ask casually!

Fearless Job Hunting, Book 8: Play Hardball With Employers, especially “Due Diligence: Don’t take a job without it,” pp. 23-25. This is a must when considering a job at a start-up, though this section applies to established companies, too.

Fearless Job Hunting, Book 9: Be The Master of Job Offers, especially “Non-Compete: Did I really agree to that?”, pp. 5-7.

There’s a lot more to start-ups, of course. (See Ben Slick’s excellent article, Evaluate a Start-Up Job Opportunity Like a Venture Capitalist.) If something I’ve said is helpful, I’m glad. I’d love to know what you decide to do and what comes of this. Thanks for your kind words about Ask The Headhunter!

For those considering the excitement of working at a start-up, if it’s what you really want to do, don’t be dissuaded by risk. As this reader points out, it can be an exciting experience. Just follow my two simple rules, and make sure you protect yourself on both the upside and the downside. I hope you get rich, but don’t end up losing your shirt.

(If you’re thinking about making the leap to starting your own start-up, learn more about Trading Your Job For Venture Funding.)

Have you ever worked for a start-up? How did it turn out? Did you protect yourself? (Did you get rich?) How would you advise this reader?

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Should I give equity to entice a new hire?

On March 12, 2012

In the March 13, 2012 Ask The Headhunter Newsletter, the owner of a start-up business asks whether it’s smart to give equity to a new hire:

After years of frustration with the way many professional services firms treat their clients, I decided to launch my own business. I have had modest success in my first six months and I am considering adding an employee. The individual that I am interested in has expressed concern about the added risk of working for a small company. He wants me to give him an equity stake to offset the risk, but I don’t want to give away too much too early, considering the competitive nature of the marketplace and my own business vision. What would you recommend?

Here’s the short version of my advice:

(For the entire column, you need to subscribe to the free newsletter. Don’t miss another edition!)

My Advice

There are two kinds of people in your start-up world, other than clients: employees and investors. You can’t fill a job with an investor. You must fill it with an employee.

Now, I’m a big believer in sharing profits with good employees. And I think it’s a great idea to make employees owners to a reasonable extent, commensurate with their commitment to the business. That’s what profit-sharing plans are about.

But employees must earn their way into ownership of the business. It’s simply not good management practice to give away ownership of your company before you know what you’re getting in return. If this individual were bringing you new clients or some kind of intellectual property to enhance the value of your company, then and only then would I consider giving him equity from the outset.

If you hire an employee whose contributions become a true investment and a key part of your business, then at some point sharing some equity may be a key to your long-term success.

You can test this candidate’s motivations. Try this:

How to Say It
…(Sorry, this part is only in the newsletter… Don’t miss next week’s edition. Sign up now. It’s free!)…

…This person is clearly looking for security and potential riches without making a solid investment.

I’d find another candidate, or someone who wants to invest in your business as a partner. Take a look around: Even jobs with big, stable companies are risky. There is no such thing as job security.

In the future, I would look for candidates who want to add value to your business and to make you more successful — not ones that want you to protect them from risk. Talk about jobs and salary to potential employees. Talk about investment and risk to investors. But don’t confuse the two.

Does your company offer equity to new hires? Have you ever accepted equity to join a start-up? How did it work out? I’d like to hear what you have to say about the risks of start-ups — and the joys of taking risks!

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