How do stock options work for startups?
Types of startup stock options Stock options aren’t actual shares of stock—they’re the right to buy a set number of company shares at a fixed price, usually called a grant price, strike price, or exercise price. Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference.
What happens to stock options when you leave a company?
What happens when you leave the company Stock options aren’t actual shares of stock—they’re the right to buy a set number of company shares at a fixed price, usually called a grant price, strike price, or exercise price. Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference.
How much should you assign stock options to your employees?
Assigning stock options based on percentage is relatively simple. You say “You, employee, own X% of this company.” So, if we throw some numbers in there, you could give an employee 1% of your company. If your company exits for $100 million, they would make $1 million.
When should startups issue restricted stock?
“Startups can issue restricted stock in the early stages when the value of the shares is so low that the employees will not be taxed much,” he explains. “Beyond this point, it makes sense to start issuing stock options.
Do startups offer stock options?
A startup stock option agreement is just what it sounds like—an agreement between a startup and an employee that outlines everything the employee should know about how and when they'll be granted options. Your stock option agreement is not the same as your offer letter.
How do stock options price startups?
Multiply your ownership stake by the company's current $1 billion valuation to find that your options are theoretically worth $10,000 minus the costs to exercise (strike price and taxes; more on that below). You should play around with different figures for the company's valuation at exit.
Why do startups give options instead of stock?
Many businesses issue various forms of equity to key employees. They do this because it helps align interests and puts the business as a whole in the best possible position to succeed. Companies commonly issue stock options to their employees instead of common stock.
Can stock options be free?
Once you exercise, you own all of the stock, and you're free to sell it. You can also hold it and hope that the stock price will go up more. Note that you will also have to pay any commissions, fees and taxes that come with exercising and selling your options.
Are startup options worth it?
Often, these options are worth as much if not more than the base salary offered, and so evaluating competing offers on a financial basis can get pretty complex. Typically, candidates will consider the value of the options at the most recent price for its shares, but there are big problems with this approach.
How many options should I get at a startup?
Employee option pools can range from 5% to 30% of a startup's equity, according to Carta data. Steinberg recommends establishing a pool of about 10% for early key hires and 10% for future employees. But relying on rules of thumb alone can be dangerous, as every company has different cash and talent requirements.
Can I sell my startup options?
If you have stock options or shares in a private company / startup, it can be a long wait for the IPO. So you might be wondering: Can I sell my pre-IPO shares and get some cash instead? The short answer is yes.
How much stock do startups give?
between 10-20%At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. That means you and all your current and future colleagues will receive equity out of this pool.
Do startups give options or RSU?
A startup, by definition, is a company that's not publicly traded so they don't have the ability to offer RSUs the way FAANG companies do. Instead they offer their employees equity.
Are options better than stocks?
Options can be less risky for investors because they require less financial commitment than equities, and they can also be less risky due to their relative imperviousness to the potentially catastrophic effects of gap openings. Options are the most dependable form of hedge, and this also makes them safer than stocks.
How long can you hold a stock option?
10 yearsGenerally, you must hold options for a period of time before exercising them. The exercise period. This is the amount of time you have to exercise your options once they vest. In most cases, you'll have 10 years from the date of grant before your options expire.
Which companies give stock options?
These 10 Companies Are Generous with Stock OptionsGenentech. 100 Best Companies rank: 11. ... GoDaddy. 100 Best Companies rank: 95. ... Stryker. 100 Best Companies rank: 21. ... The Cheesecake Factory. 100 Best Companies rank: 98. ... Aflac. 100 Best Companies rank: 50. ... Cadence. 100 Best Companies rank: 52. ... Intuit. ... Nordstrom.More items...•
How do startups negotiate stock options?
Many startup employees give up part of their salary for a share in the company's long-term success. Here's how to negotiate your equity package.Keep an eye on your vest length. ... Watch out for the cliff edge. ... Keep strike prices down. ... Spread the load equally. ... Need for speed. ... Have one eye on the door.
How is stock option strike price determined?
How is the stock option strike price determined? Companies almost always determine the strike price of their stock options based on the fair market value (FMV) of their shares.
How do you value stock options?
The quick way of calculating the value of your options is to take the value of the company as given by the TechCrunch announcement of its latest funding round, divide by the number of outstanding shares and multiply by the number of options you have.
How do private companies value stock options?
Methods for valuing private companies could include valuation ratios, discounted cash flow (DCF) analysis, or internal rate of return (IRR). The most common method for valuing a private company is comparable company analysis, which compares the valuation ratios of the private company to a comparable public company.
What is a startup stock option?
Stock options aren’t actual shares of stock—they’re the right to buy a set number of company shares at a fixed price, usually called a grant price, strike price, or exercise price. Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference.
What are employee stock options?
There are two types of employee stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs). These mainly differ by how and when they’re taxed—ISOs could qualify for special tax treatment. Note: Instead of stock options, some companies offer restricted stock, such as RSAs or RSUs.
What does vesting mean in stock?
Vesting means you have to earn your employee stock options over time. Companies do this to encourage you to stay with them and contribute to the company’s success over many years.
How long do stock options last?
Your stock option agreement should also specify its expiration date. In general, ISOs expire 10 years from the date you’re granted them. However, your grant can also expire after you leave the company—you may only have a short window of time to exercise your options (buy the shares) after you leave.
What is an option grant?
Stock option grants are how your company awards stock options.
Why do companies offer stock?
Companies often offer stock as part of your compensation package so you can share in the company’s success. But they don’t usually explain what you need to know so you can make informed decisions. Here’s how to make sense of your offer letter and option grant.
What happens to your shares when you leave a company?
Termination. If you leave the company, your shares will stop vesting immediately and you can only buy shares that have vested as of that date. And you only maintain this right for a set window of time, called a post-termination exercise (PTE) period. Historically, many companies made this period three months.
What equity offers and contracts look like
Startup employment offers typically consist of base salary plus stock options. It's also common to have a trade-off between cash and equity by giving the candidate a choice between multiple parallel offers, such as
How much are stock options worth?
When you buy stock in a publicly-traded company, say, Procter & Gamble, you probably expect growth at about the market average of 5-10% every year. Due to economic cycles, prices may vary by a few tens of percent. The occasional company goes bust, but the default expectation is slow compounding growth.
How much stock to expect
Equity compensation, like cash, varies with role and experience, among other factors. I only have a few data points from myself and my friends, so please take these numbers with a grain of salt.
Making a choice
You can now compare offers! But making the actual trade-off is pretty personal. Here are a few things to consider.
Worksheet
Filling in the below is a helpful way to think through the value of a stock grant.
How do stock options become valuable in a startup company?
Stock options are essentially worthless until a company is sold, launches an Initial Public Offering (IPO), or becomes profitable. When a company becomes profitable, the company may pave a way for its employees and investors to exercise their stock options.
Do stock options expire?
Stock options generally have an expiration date, although this is something that is determined by a company. You should be able to find out what your stock options expiration date is by asking your employer or business partner or reviewing your stock options contract.
