Stock options can make you rich, fund your retirement, provide a one-time perk — or they can break your heart. Over the past few years, I've heard from MSPmentor readers who worked for companies involved in mergers and acquisitions (M&A). Some of those readers assumed their stock options would generate a healthy payout during an M&A transaction. But in some cases, the stock was worthless. Here's why.

First, let me speak from direct experience. I've previously worked for two large media companies that either (A) granted me stock options or (B) allowed me to buy shares as part of an IPO process. Neither approach made me rich. And in some cases, the options turned out to be worthless.

When Employees Become Owners

My first experience with employer stock arrived around 1996, when CMP Media went public. I was an editor on Windows Magazine, one of the company's newsstand publications. The company owners, the Leeds family, were generous. All employees received some stock as part of the offering. The sum was based on years of service and rank at the company, I believe. When CMP launched its IPO, most rank-and-file employees made a few thousand dollars, I believe. Perhaps a handful of executives truly got "rich." But everyone in the company was grateful to the Leeds family for their generosity. 

Poke around the MSP software market and you'll hear a similar approach at ConnectWise, which has pushed ownership out to all employees. I believe it will take some sort of financial event — IPO, company sale, etc. — for the options to trigger. I don't think CEO Arnie Bellini is rushing to make that type of move anytime soon. But the gesture — employee ownership — is in place.

Buy and Sell… Fast

My second experience with employer stock arrived around 2000 or so, when Ziff Davis Media spun off its ZDnet business as a tracking stock. This time there were no stock options for most employees, but we were allowed to buy a few shares as part of the IPO process. The idea for most of us was to get in and get out fast and make a few bucks. Again, most folks didn't get rich.

My other big media experiences involved stock options — neither of which paid off for me. In 1998 I got stock options from Ziff Davis Media. But I ultimately left the company and they were worthless. In 2004 I was back at Ziff Davis Media and once again I got options but I left because a few friends whom I respected had launched their own business. I decided to go have some fun and hang out with mentors rather than wait for a potential trigger event for my Ziff options.

Now here's the twist. When portions of Ziff Davis Media were acquired around 2007 and again in 2010 or so, a few former team members asked me if they should contact the company to see what their stock options were worth. After all, the options had vested during their time at the company. But there was a cruel twist: For many folks the old options were worthless because Ziff Davis Media had declared bankruptcy at one point in the recent past, and reworked its financing.

Boom or Bust? 

I'm starting to hear somewhat similar stories in the MSP software market. Some employees expected to make a few bucks — $1,000… $10,000… $100,000 or more — amid M&A deals. But many of those employees discovered their options were worthless or nearly worthless because they had "B" shares or secondary shares. In some cases, only "A" share or primary shareholders were rewarded as part of the company deals. Or perhaps the shares were for a subsidiary of the business — but only shareholders who had a stake in the primary business (or holding company) got rewarded.

My advice?: Consider stock options a bonus you may never ever get. Don't count on them. Live within your means. Ask your lawyer exactly what the terms in your options agreement mean. For many readers, stock options will deliver a fantastic reward amid an M&A or IPO transaction. But for many other readers the net sum gained will be $0.