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