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Startup Stock Options – Why A Good Deal Has Gone Bad

Steve Blank

For most startup employee’s startup stock options are now a bad deal. Why Startups Offer Stock Options. In tech startups stock options were here almost from the beginning, first offered to the founders in 1957 at Fairchild Semiconductor , the first chip startup in Silicon Valley. As Venture Capital emerged as an industry in the mid 1970’s, investors in venture-funded startups began to give stock options to all their employees.

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Understanding Stock Options

YoungUpstarts

In today’s start-up culture, it’s common for companies to offer employees the opportunity to own stock in the business. While most folks know the basic benefits of receiving stock, many employees are taken off guard by the tax implications that follow. There are two types of stock options, Incentive Stock Options (ISO) and Non-Qualified Stock Options (NQSO). Incentive Stock Option (ISO). Non-Qualified Stock Option (NQSO).

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How Valuable Are Stock Options Offered By A Startup?

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Many employees forget that there isn’t even a market for startup stock, until after the company has gone public, which hasn’t happened positively to many companies in the last few years. Thus, options don’t “pay the mortgage” today, so to speak. Your compensation is the total package of stock plus salary plus benefits.

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Startup Stock Options Are Not Reliable Compensation

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Many employees forget that there isn’t even a market for stock, until after the company has gone public, which hasn’t happened positively to many companies in the last few years. Thus, stock doesn’t “pay the mortgage” today, so to speak. Your compensation is the total package of stock plus salary plus benefits.

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How Many Startup Stock Options are Enough?

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Many employees forget that there isn’t even a market for stock, until after the company has gone public, which hasn’t happened positively to many companies in the last few years. Thus, stock doesn’t “pay the mortgage” today, so to speak. Your compensation is the total package of stock plus salary plus benefits.

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A Different Approach to Refreshing Stock Option Grants

Feld Thoughts

It’s the annual bonus, next year bonus plan, option grant refresh cycle. I’ve never really understood why the majority of stock option refresh grants are stacked grants mid-way through the granting process. Assume you hire someone and grant them 10,000 options with monthly vesting of four years with a one year cliff. That means that after one year, they get 25% of their options and then start vesting the remaining options monthly at a rate of 1/48 (208.3

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Should You Negotiate Ownership Options In A Startup?

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Thus, options don’t “pay the mortgage” today, so to speak. Your compensation is the total package of stock plus salary plus benefits.

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How to Discuss Stock Options with Your Team

Both Sides of the Table

Options are gravy - I lived through the first dot com era where we used stock options as a recruiting tool. Options are obviously a very important economic motivator for your first 3-5 employees and your most senior management team. We give out stock options. Not because we don’t want them to be valuable, but because we don’t want to create an “options culture&# around here.

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Stock options: Guard the Gold

Berkonomics

Use stock options and warrants to pay for service only rarely. Earlier, I stated that stock options are the currency of early stage business. There are times when services of others are available for stock instead of – or in addition to cash. When assessing the relative merit of using attractive non-cash forms of compensation for outside services, first be aware of the true value of your stock.

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New Venture Equity As Compensation Is A Long-Term Bet

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Many employees forget that there isn’t even a market for startup stock, until after the company has gone public, which hasn’t happened positively to many companies in the last few years. Thus, options don’t “pay the mortgage” today, so to speak. Your compensation is the total package of stock plus salary plus benefits.

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Stock Option Plan Rule of Thumb No. 1

Business Plan Blog

Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan. It is critical for a start-up to consider this reality and reserve 10-20% of its outstanding equity for a stock option plan. Most sophisticated investors will require a stock option pool upon investment, and a company that fails to reserve a sufficient amount of equity up-front runs the risk of being forced to establish a pool at a later date that may dilute the founders’ ownership.

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Early stage boards work for stock options, not cash.

Berkonomics

Pay early stage board members of companies that are not lifestyle businesses one percent of the fully diluted equity in the form of an option that vests over four years of service. The option price should be set by appraisal under IRS rule 409a, and certainly should be low enough to recognize that common stock options are not worth as much as preferred stock, given the many preferences of the latter.

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Google Stock Option Re-pricing: Get Over It

abovethecrowd.com

Prominent finance publications like the WSJ and the Motley Fool along with several bloggers have recently taken shots at Google with respect to their decision to re-price a boat-load of employee stock options. Just to review the details, in their last earnings call google management stated that they would offer all employees with options that have strike prices above the [.]. Internet Uncategorized Web/Tech Finance Google options stock options

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Stock Option Plan Rule of Thumb No. 4

Business Plan Blog

If a director or advisor’s term is discontinued, a lenient post-termination exercise period may be very valuable to an option holder. I advise clients to draft the option grant to permit exercise up to ten years after termination, depending on when the option was granted in relation to when the option plan was adopted. This article was contributed by William W Eigner, Esq. & & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP. .

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Stock Option Plan Rule of Thumb No. 2

Business Plan Blog

Issue Options According To Value Added And Risk Taken. Options are often issued as a reward, either for services rendered or risk assumed by the recipient. It can be difficult to assess the intangible value of certain directors or advisors, and although a high profile individual is generally awarded a larger option package, the industry credibility and networking opportunities a director or advisor offers are not easily appraised.

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Stock Option Plan Rule of Thumb No. 5

Business Plan Blog

For advisors, I recommended that companies avoid too much specificity, but nail down the length of service and the option terms, include an indemnification provision, and provide for confidentiality in a written advisor agreement, the term of which may be terminated at any time. This article was contributed by William W Eigner, Esq. & & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP. . Try Not To Jeopardize Relationships.

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Stock Option Plan Rule of Thumb No. 3

Business Plan Blog

Gradually vesting a director’s and advisor’s options align their compensation with their actual service while protecting the company in the event that they are prematurely removed from the board. In this circumstance, vesting only allows a short-lived director or advisor to receive the fraction of the option package that corresponds with the director’s or officer’s actual term of service. This article was contributed by William W Eigner, Esq. &

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Stock option expensing

BeyondVC

Jeff Nolan has a good overview of stock option expensing, and why we should get involved. While I agree for the need for complete transparency of stock options, I also do not believe that expensing all options at the grant date will get us closer to true economic reality. In addition, I believe the unfair burden of stock option expensing falls on private companies-FASB even recognizes this.

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How Much Stock Would Convince You To Join A Startup?

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Many employees forget that there isn’t even a market for startup stock, until after the company has gone public, which hasn’t happened positively to many companies in the last few years. Thus, options don’t “pay the mortgage” today, so to speak. Your compensation is the total package of stock plus salary plus benefits.

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How Much Stock Should Startups Dole Out?

YFS Magazine

One of the toughest compensation-related questions that founders and executives face is that of granting stock to key employees, board members, advisors or consultants. Finance Grow employee stock options money raising capital raising startup capital stock options

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ESOP Fables: Reviewing The Myths And Facts About Employee Stock Ownership Plans

YoungUpstarts

Employee stock ownership plans (ESOPs) can be an attractive way for an owner to sell a company and for employees to gain an ownership stake. ESOPs are qualified retirement plans that buy, hold and sell company stock for the benefit of employees. One of the main reasons ESOPs are often dismissed by business owners (and their advisors) as a legitimate succession planning option is due to the many unfounded misperceptions about them. by Timothy L. Stewart and Bryan Browning .

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Legal Checklist for Startups

Scott Edward Walker

Don’t issue stock options unless a proper option plan is in place and a valuation has been done in compliance with Section 409A of the Internal Revenue Code (see post here ). Startup Issues 409A 83(b) election accredited investors checklist for startups corporate lawyer equity IP ownership legal checklist legal fees stock options vesting schedules

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How Much Stock to Ask For When Joining a Startup

Startup Professionals Musings

By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” Many employees forget that there isn’t even a market for stock, until after the company has gone public, which hasn’t happened to many companies in the last few years. Thus, stock doesn’t “pay the mortgage” today, so to speak. Your compensation is the total package, stock plus salary. Tags: compensation startup stock options business

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The Value of Ownership

OnlyOnce

We give stock options to every employee, and we regularly give additional grants to employees as well, as their initial grants vest, as they get promoted into more senior roles, and as they earn them through outstanding performance. Business Culture Human Resources Leadership Management Return Path awards owner problems and solutions Return Path core values stock optionsThe Value of Ownership. We believe in ownership at Return Path.

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What are ISOs?

The Startup Lawyer

A stock option grants you the right to purchase a certain number of shares of stock at a pre-established price. An incentive stock option (ISO) is a type of stock option that allows favorable tax treatment to the stock option holder. 2) receive long-term capital gains treatment for taxable gain at the stock sale (instead of ordinary income tax rates). Stock Option Plan. ISO Option Length.

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How much should you pay an executive in a startup company?

Startup Company Lawyer

Tags: Stock options

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Crucial Things You Need To Know About Your First External Audit For Series B

YoungUpstarts

That can affect your first-time audit in two main ways: with stock option expensing and 409A Valuations. Stock Option Expensing. . When you want to issue financials that are GAAP compliant, you need to expense your stock options.

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7 Keys To Heightening Your Business Team Engagement

Startup Professionals Musings

Another example is Facebook , maintaining motivation with food, stock options, collaborative office space, an on-site laundry, and a competitive atmosphere that fosters personal growth and learning with great benefits.

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6 Key Leaders Every Technical Startup Needs To Thrive

Startup Professionals Musings

Outside professionals are always available, but they may have their own agenda, such as building a career, making money quickly, or managing up the stock price for a quick exit.

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10 Strategies To Avoid Bad Risks In Your New Venture

Startup Professionals Musings

Great team members may take more time to find, and cost you stock options, but a qualified and highly motivated team that stretches your budget is a good calculated risk. There is an old saying that good lawyers run away from risk, while good businessmen run towards risk.

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CMO CTO COO Equity and Compensation

SoCal CTO

To find the equity numbers that were relevant for the particular person here, I went back through my prior post and looked at Wilson Sonsini and DFJ Gotham Ventures The Option Pool Shuffle Employee Equity How Much How much equity for investors and employees? Quick & Dirty How-To: Employee Stock Option AllocationsI was just asked about a particular startup situation (seed stage, CMO hire, non-founder) and particularly what compensation and equity is appropriate.

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8 Organizational Cultures Boost Output And Cut Costs

Startup Professionals Musings

Their reward is more free time for leisure, or more time for bonus objectives and stock options. Virtually every collaboration platform and mainline business process today has a cloud-based deployment option.

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8 Red Flags To Evaluate Before Pledging To A Startup

Startup Professionals Musings

Calculate employee stock option values and vesting times, as well as salary. Every startup founder loves to prompt for questions from investors and potential key team members about their vision, and the huge opportunity that can be had with their disruptive technology.

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10 Startup Founder Decisions That Have No Good Answer

Startup Professionals Musings

Offer low cash early, with bonuses or stock options for milestones, to people in your personal network.

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Change of Control Option Acceleration

ithacaVC

I was recently in a board meeting and the topic of change of control stock option vesting acceleration came up. But the recent discussion confirmed my view that double trigger stock option vesting acceleration is very clunky, difficult for management teams to understand when it actually matters (at the time leading up to the change of control) and, in my view, should be used infrequently.

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Why not share your liquidity success with those who got you there?

Berkonomics

Formal option plans for some. Some companies, especially those financed by angel or VC investors, have good, formal stock option plans with properly priced options set to reward all employees and managers in the event of a corporate sale. Usually, the higher the ranks, the more the options held and therefore the greater reward at exit. So, you are close to selling your company, and counting the profits a bit early. Well, that’s human nature.

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10 Creativity Mistakes Jeopardize Long-Term Survival

Startup Professionals Musings

An even better alternative could be stock options, linked to the long-term success of the company. Success in any business these days requires a constant flow of new and innovative solutions, to keep up with changes in the market, competition, and to attract new customers.

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6 Risks For Taking A Side Door Into A Public Exchange

Startup Professionals Musings

A reverse merger is the acquisition of an already public company (usually a dormant shell) to avoid the Initial Public Offering (IPO) process and cost, to quickly get your startup on a public exchange for fund raising through visibility and selling stock.

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Entrepreneur Trader Tip: Use Implied Volatility to Your Advantage

The Startup Magazine

Implied volatility (IV) is an effective strategy for options trading. IV is based on how a stock is expected to perform over the course of a year. The standard deviation for stock options is 68.2%. This means that the SD range for the stock is $120 to $180.

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8 Questions You Should Ask Before You Join A Startup

Startup Professionals Musings

Calculate employee stock option values and vesting times, as well as salary. Every startup founder loves to prompt for questions from investors and potential key team members about their vision, and the huge opportunity that can be had with their disruptive technology.

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What’s To Stop Twitter’s New Owner From Publishing The Company’s Historical Internal Emails?

Hunter Walker

No, not their stock options or employment (job cuts are almost certainly coming but we’re in a robust market for talent and I’m assuming there are already many folks proactively looking for new opportunities), but the internal communications that sit within HQ.

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The right way to give equity to your employees

The Next Web

stock, options, warrants). As a rule, entrepreneurs are very protective of their equity, and try to keep 100 percent ownership for themselves. Usually this is fine, provided that important key parties (e.g., employees, partners) are appropriately motivated to help you succeed. Sometimes that motivation comes in the form of cash compensation (e.g., lucrative sales commission plan, profit share plan), and sometimes that comes in the form of equity or equity linked incentives (e.g.,

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15,000 Tech Workers Have Been Let Go In May. Were You One of Them?

Hunter Walker

Extend Your Stock Option Exercise Period. The ‘average’ startup offers a 90 day period post employment where you have to exercise any vested stock options before forfeiting them back to the company. The Things to Know When You Lose Your Job In A Downturn.