See how Wealthfront can help you reach your financial goals. It was meant to be a comprehensive list of option-related questions you need to ask when you receive an offer to join a private company. A stock option is the right, but not the obligation, to buy a share of the company stock at some point in the future at the exercise price. What really matters is the percentage of the company the options represent, and the rapidity with which they vest.
When you receive an offer to join a company, ask these 14 questions to ascertain the attractiveness of your option offer:. What percentage of the company do the options offered represent? This is the single most important question. Obviously, when it comes to options a larger number is better than a smaller number, but percentage ownership is what really matters. For example if one company offers , options out of million shares outstanding and another company offers 10, options out of 1 million shares outstanding then the second offer is 10 times as attractive.
Are you including all shares in the total shares outstanding for the purpose of calculating the percentage above? Some companies attempt to make their offers look more attractive by calculating the ownership percentage your offer represents using a smaller share count than what they could.
To make the percentage seem bigger, the company may not include everything it should in the denominator. What is the market rate for your position? Every job has a market rate for salary and equity. How does your proposed option grant compare to the market? A company typically has a policy that places its option grants relative to market averages.
Some companies pay higher salaries than market so they can offer less equity. Some do the opposite. Some give you a choice. All things being equal, the more successful the company, the lower percentile offer they are usually willing to offer. For example, a company like Dropbox or Uber is likely to offer equity below the 50 th percentile because the certainty of the reward and the likely magnitude of the outcome is so great in terms of absolute dollars.
What is the vesting schedule? The typical vesting schedule is over four years with a one-year cliff. If you were to leave before the cliff, you get nothing.
Anything other than this is odd and should cause you to question the company further. Some companies might request five-year vesting, but that should give you pause.
Does anything happen to my vested shares if I leave before my entire vesting schedule has been completed? Typically you get to keep anything you vest as long as you exercise within 90 days of leaving your company. At a handful of companies, the company has the right to buy back your vested shares at the exercise price if you leave the company before a liquidity event.
In essence, this means that if you leave a company in two or three years, your options are worth nothing, even if some of them have vested. Skype and its backers came under fire last year for such a policy. Do you allow early exercise of my options? Allowing employees to exercise their options before they have vested can be a tax benefit to employees, because they have the opportunity to have their gains taxed at long-term capital gains rates. This feature is usually only offered to early employees because they are the only ones who could benefit.
Is there any acceleration of my vesting if the company is acquired? If so, you would probably want some acceleration so you could leave the company after the acquisition.
Many companies also offer an additional six months of vesting upon acquisition if you are fired. Are options priced at fair market value determined by an independent appraisal? What is the exercise price relative to the price of the preferred stock issued in your last round? If your options are priced near the value of the preferred stock, the options have less value. Make sure the company uses fully diluted shares outstanding to calculate your percentage.
Only boards of directors can technically issue options, so you will typically not know the exercise price of the options in your offer letter until your board next meets. If your proposed employer is private then your board must determine the exercise price of your options by what is referred to as a A appraisal the name, A, comes from the governing section of the tax code.
Most likely that means your exercise price will go up, and, correspondingly, your options will be less valuable. What did the last round value the company at? The value tells you the context for how valuable your options could be. How long will your current funding last? Additional financings mean additional dilution. If a financing is imminent, then you need to consider what your ownership will be post-financing i.
Refer back to question number one for why this is important. How much money has the company raised? This might seem counterintuitive, but there are many instances where you are worse off in a company that has raised a lot of money vs. The issue is one of Liquidity Preference. Venture capital investors always receive the right to have first call on the proceeds from the sale of the company in a downside scenario up to the amount they have invested in other words priority access to any proceeds raised.
Ascertain and compare the current market rate for your position to your offer and, likewise, try to compare any proposed option grant to the market as well. Investors will only convert their preferred stock into common stock once the sale valuation is equal to the amount they invested divided by their ownership.
You never want to join a company that has raised a lot of money and has very little traction after a few years because you are unlikely to get any benefit from your options. Does your prospective employer have a policy regarding follow-on stock grants? As we explained in The Wealthfront Equity Plan , enlightened companies understand they need to issue additional stock to employees post-start-date to address promotions and incredible performance and as an incentive to retain you once you get far into your vesting.
For more perspective on this issue we encourage you to read An Employee Perspective on Equity. As a result employees tend to be given fewer RSU shares than they might receive in the form of stock options for the same job.
We hope you find our new and improved list helpful. Please keep your feedback and questions coming and let us know if you think we missed anything. He serves as a member of the board of trustees and vice chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship.
Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware.
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