Home Stock Options 101: Negotiating Ownership

Stock Options 101: Negotiating Ownership

Before moving to the Valley I thought stock was something you made by simmering meat and vegetables in a pot of boiling water. To this day I’m still no expert in negotiating for equity, but I recognize a great resource when I see one. Fansnap co-founder and investor Andrew Payne recently wrote an article entitled, Startup Equity for Employees. Payne offers a stock cheat sheet and some useful points to consider.

Options & Vesting:You generally don’t get your stock right away and most companies grant you an “option” to purchase stock over time at a fixed strike rate. This time period is your vesting period and your strike rate is the price of purchase. As the company goes through changes Payne advises employees to pay attention to how their strike rates increase and renegotiate accordingly. Higher strike rates may mean that employees will be less capable of exercising all of their options.

Outstanding Shares: Says Payne, “a share number is meaningless without knowing the total number of shares outstanding.” As an employee, you should figure out what percentage of the company you own based on the number of shares that exist.

Preferred Stock: Writes Payne,”Common stockholders should care about the preference, because that preference is ahead of the commons in any acquisition outcome.” Unless you’ve invested a significant amount of money in your company, you likely have common stock. In the event of an acquisition, preferred stock holders such as investors and founder/investors get paid out on their investments first before common stock holders earn any money. Once you get the total preference number for the company, you can roughly calculate how much you’re likely to make or not make in the event of an acquisition.

Dilution: Companies raise new money by creating and selling new shares. The number of outstanding shares then increase and your shares are diluted and reduce in value. While many companies grant additional stock to employees, according to Payne, it’s rarely enough to compensate. He advises you to, “negotiate for the largest equity portion you can, because that initial grant is going to be the bulk of your ownership and will get diluted down from there.”

Incentive Stock Option Pool: Find out the size of the ISO pool and how much stock has been allotted to employees until the next round of funding. Without a decent stock incentive, you may find your company hiring only the lackluster employees who’ll accept a less-than-generous offer.

For Payne’s complete article visit Payne.org and for more advice check out Salary.com. Once you’ve read these articles you should have enough information to consult with your lawyer and accountant.

If you’ve got more resources to suggest, let us know in the comments below.

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