How to evaluate stock options

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• Part II: How to evaluate an options grant!
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This is all sensitive information kept behind privacy screens in the finance office. I agree with you. So you want to feel truly in the money before locking up cash in these options and leaving them out there for who knows how many years. The best scenario is just to be employed at the time of a sale, in which case all this will be made transparent and money will arrive in your bank account without you having to pony up cash most times they will just calculate how much you would have made and send you the difference.

However, because of this lack of transparency, I place much less value in stock options unless the company is publicly traded. The exception is if you are C-level employee who has access to all this information. But as a developer or mid-level manager in a privately owned company?

Four Steps To Evaluate a Stock Option Grant

Make sure you see your way to Of course, this is just one point of view and I encourage you to consult a lawyer about the details. Other folks who work in the space, feel free to weigh in. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. Written by someone who retired at 28, The Money Habit is a personal finance site that focuses on investing, saving, and earning strategies to help you achieve financial security.

Some posts may include affiliate links, which share a commission with the blog at no additional cost to you. We take privacy very seriously at The Money Habit.

From one normal person to another, we get that no one wants their information handed out willy nilly. So check out our privacy policy over here. Skip to content Skip to primary sidebar Skip to footer What are you looking for? The other shareholders. Vesting Along with this grant typically comes a vesting schedule. Oftentimes vesting is done on an annual schedule. How are you supposed to get this information? Some caveats: This is based on market multiples today.

In highly volatile markets like technology, average multiples can change by more than a turn or two in 12 months. This is based on company performance today. If the company is a high-growth rocket ship, the valuation company probably used premium market multiples. Their shares are worth more than yours. They have preferences that can take more than their economic share in the downside scenario. How much you discount your shares by depends on how much downside you think is likely.

In that downside scenario, be hyper aware that you may receive much less money than you expect. They choose to get paid back in full by using their liquidation preference. Where do those extra dollars come from?

Understanding Startup Stock Options

They come from the common shareholders, which means they come from you. Your options are literally worthless. They paid double what the company sold for, and they own half the company. They get paid back first before common sees a dime.

Teardown: How Much Are Your Stock Options Really Worth?

Enjoyed This Post? No spam. We respect your privacy. Leave a Reply Cancel reply Your email address will not be published. Leave this field empty. Footer The Money Habit Written by someone who retired at 28, The Money Habit is a personal finance site that focuses on investing, saving, and earning strategies to help you achieve financial security. Affiliate Links Some posts may include affiliate links, which share a commission with the blog at no additional cost to you. Disclaimer Posts represent my opinions and experiences and are for educational purposes only.

I am not a financial advisor and these posts do not represent formal financial advice. Like future options, a well-managed company will be able to judge the amount of investor capital it intends to raise in the future, as well as the valuation s at which such investment s will be made. Subsequent stock options may depend on your tenure and performance.

As mentioned above, the standard vesting schedule is over four years with a one-year cliff. If you depart prior to the cliff, you will receive nothing. You will usually be permitted to keep any shares that you vest provided that you exercise within 90 days of leaving the company. Some companies have the right to buy back your vested shares at the exercise price if you leave the company before a liquidity event.

As such, if you were to leave a company in two or three years, your options would be worth nothing, even if some of them had vested. Make sure you understand how this works. Always negotiate your base salary before you discuss other types of benefits, like stock options. When negotiating stock options, ask if the company has a standard scale.

The Downside Risk

If not, ask for the rationale and argue to be included in the standard range. In addition, perhaps you can negotiate your way into the next bracket and gain greater stock options.

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Stock options can be a great perk for a new employee. There are pitfalls as described here, so be sure you fully understand how stock options work at your new company. You can also talk to a stock option lawyer for guidance. Exactly what is a stock option? How many shares will my option allow me to purchase? How many other options will be authorized?