Are Your Stock Options Worthless?: Part 2
After recent mergers and acquisitions, some MSP industry veterans discovered their stock options were worthless. Of course, it's nearly impossible to predict exactly how much your options could be worth. But a savvy MSPmentor reader sent some timely guidance — five tips, to be exact — to help readers navigate various stock option scenarios. Here are the tips…
1. What's your percentage?: Find out what percentage of the company your stock options represent. For instance, if you have 1,000 shares amid 100,000 shares outstanding that's not bad. But if you have 1,000 shares in a pool of 50 million shares, your slice of the pie is minimal.
2. Investment history?: Find out how much money is invested in the company. Venture capitalists (VCs) typically get Preferred Stock, which gets paid out prior to Common Stock, which is where Stock Options typically fall. For instance, let's assume:
- You work for a company with $5 million in VC funding.
- The company gets sold for $10 million.
- The initial $5 million (plus interest) gets paid first, then the remaining $5 million gets distributed.
3. Dilution?: If there is Series B, C, etc. of investment and all current shareholders are diluted, is there a subsequent stock option grant for the employees to make them “whole.” Also, do the subsequent stock option grants vest on the same schedule as the initial grant?
4. What about vesting?: Find out what the vesting schedule is. Generally speaking, it's often four years with a one-year cliff, then vested on a monthly or quarterly basis.
If an employee gets an additional grant two years after the start date, is the vesting schedule another four years with a one-year cliff? This is often negotiable, however, the board and investors typically frown upon modifications to the vesting schedule.
5. Acceleration?: If the company gets acquired prior to all stock options completely vesting, what happens? This is also a point of contention because it could potentially be a barrier to acquisition. Again, employees can try to negotiate a 50% vesting of the remaining options if 51%+ of the company changes hands.
According to MSPmentor's friend in the know:
"It’s a complicated game and definitely risky. But the upside could prove fruitful. A potential employee needs to negotiate total compensation (and allocation of compensation) based on their risk tolerance, stage of life, salary, commission (sales-related jobs) and benefits (health, dental, 401K, etc.), and weigh the offer/compensation relative to industry standards."
Well said. MSPmentor thanks the industry source who raised his (or her…) hand and shared the thoughts above. I look forward to our next conversation (hopefully not in Las Vegas at 2 a.m. shopping in the frozen food aisle…).