Stock options at startup companies: are they worth it?

The stock option value of startups is an intriguing question. Are they worth it? An astute observer may have noticed that this blog post was published in April of 2012. It's not very timely, and I'm sorry if you missed the chance to invest in Facebook at a discounted price.

Stock options vs shares

If you are an employee at a startup company, then you probably have a few questions about stock options. Most employees at startups will eventually be offered stock options as part of their compensation package. But what exactly are they? And are they worth it? What Are Stock Options? Stock options are essentially rights to buy shares in a company at a later date at a pre-determined price.

The pre-determined price is called the "strike price." The strike price is typically set at the time of the offer, although some companies allow employees to choose their own strike prices if they wish. The most common way for companies to offer stock options is through an Employee Stock Purchase Plan (ESPP).

Employees can purchase shares at a discount from market value over several years after vesting requirements have been met. In most cases, ESPPs don't offer employees the opportunity to exercise their options until after two years of service or after the company goes public, whichever comes first.

What are stock options?

Stock options are a form of employee compensation that allows employees to purchase company stock at a pre-determined price. Stock option plans are often used by early stage companies to attract new hires and incentivize them to stay with the company long term. Stock options are typically offered as a percentage of the company’s stock, and can be exercised at any time before they expire.

The exercise price is the price at which an employee can buy shares of company stock. Typically, these stock options vest over a period of time (for example, 25% per year), so employees must wait until they complete their vesting period before they can exercise their options and purchase shares of company stock.

What are startup stock options worth it? If you work at a startup company and receive stock options, how much should you expect that they will be worth when you exercise them? That depends on many factors including the size of your grant, how long you wait before exercising your options and what happens to the value of the company during that time period.

It also depends on whether or not there is liquidity in an IPO or other exit event for your startup (if there’s no liquidity, then your options become worthless).

How do you cash in stock options?

Stock options are a form of compensation that give employees the right to purchase a company's stock at a fixed price. If an employee exercises their options and buys shares, they will often be required to hold on to those shares for a certain period of time — generally three years or until a liquidity event, such as an IPO.

Stock options can be granted in conjunction with any type of job offer, including full-time employment offers or freelance contracts. The process for applying for stock options at a startup is essentially the same as applying for any other job — you simply need to apply through the company’s website or by sending your resume directly to HR.

Once you have been offered an option-eligible position, you will typically receive an email asking you to fill out paperwork confirming your intent to accept the offer. You may also be asked to sign an employment contract and provide some personal information about yourself, such as your social security number and date of birth.

What types of stock options are there?

Stock options are a type of financial compensation that can be used to incentivize employees. When you work at a startup, stock options may be part of your compensation package. But before you accept an offer, it’s important to understand the benefits and drawbacks of stock options. What are stock options? Stock options are a form of equity compensation, which means they give you the right to buy or sell shares in a company at a predetermined price.

You don’t actually have to buy or sell anything until you decide to exercise your option and convert them into actual shares of stock. You’ll typically receive one or more classes of shares when you join a company as an employee (share classes). The number of shares you get decreases as your salary increases until it reaches zero once your salary reaches $250,000 annually (or $125,000 if your company is incorporated).

The goal is to make sure that everyone who works for the company has some skin in the game — even those who make more than $250k annually wouldn’t receive any stock because their salary would exceed the cap on how many shares they could receive each year.

The pros and cons of accepting startup stock options

If you're at a startup, the question of whether or not to accept stock options is a big one. On the one hand, you're getting free money from your company in the form of stocks. On the other hand, you may be giving up some control over your financial future in exchange for that money.

The benefits of accepting stock options at a startup are obvious: It's free money! The drawbacks are less clear cut. The biggest risk is that if the company goes bust, your shares will be worthless — but that risk is usually outweighed by the potential upside if everything works out well.

Stock options are an important part of compensation packages at many startups because they give employees an incentive to work hard and make sure their companies succeed. They also help keep employees happy while they wait for those shares to vest (i.e., become theirs).

Can stock options pay for your startup's failure to deliver competitive bonuses or higher than expected salaries?

If you’re a software developer or engineer working at a startup, you probably have a few questions about your equity compensation plan. Are stock options worth it? How can you make sure the company doesn’t get away with paying you less than they promised? The good news is that there is more to your equity compensation plan than just stock options.

Many startups also offer competitive bonuses, higher than expected salaries, and even employee perks like free meals or massages. The bad news is that these things can be difficult to compare against one another because they aren’t all paid in cash. If you want to know whether or not your equity compensation plan is worth the risk of starting up at a young company, these are some things you should consider: Are Stock Options Worth It? A lot of people think stock options are worthless because they don’t get paid until after an IPO or acquisition.

But this isn’t true for all companies! Some startups give their employees partial ownership in the company right from day one — especially if they have already raised money from VCs or other investors and don’t need to go public any time soon.

If the company is successful, will your shares make up for other poor compensation practices (e.g., low base salary)?

If you're considering working at a startup, you might be tempted by the prospect of stock options. A lot of people think they're a great way to make money if the company becomes successful, but they can also be a source of stress and disappointment. Here's what you need to know about them: What are startup stock options? Startup stock options are a form of compensation that gives employees the right to buy a certain number of shares in their company at some point in the future.

If the company is successful, those shares may increase in value and become worth more than their original cost. This is why they're often called "stock options." Why would I want them? If you work at a startup long enough, there's a good chance that your salary won't keep pace with inflation (especially if it's not funded by venture capital).

Stock options can help bridge this gap by providing an incentive for employees who stick around even when their pay doesn't increase much or at all.

Is it worth taking on a risk with an uncertain outcome (stock) in lieu of receiving a more certain outcome (bonus or higher salary)?

Stock options at startup companies: are they worth it? Stock options at startup companies: are they worth it? Startups often offer stock options to their employees as part of their compensation package. So, is it worth taking on a risk with an uncertain outcome (stock) in lieu of receiving a more certain outcome (bonus or higher salary)? Is there any evidence that employees who receive stock options perform better than those who don't? The answer to both questions is "it depends." On the first question, there's no doubt that startups are risky places to work.

You may not be sure whether the company will succeed or fail, but if you're lucky enough to get in on the ground floor, you might get richly rewarded if the startup does well. This is what makes stock option programs so attractive for entrepreneurs and employees alike: they align their interests by providing both parties with a stake in each other's success.

But what about performance? Do employees who receive stock options perform better than those who don't? It turns out there's a lot of research on this topic and the results aren't all that clear-cut.

In A Word...

In general, stock options are a huge incentive for new startups to attract high-caliber programmers. High-quality programmers make powerful tools, and the value of the startup will often rise as a result. However, in rare cases, the process can work in reverse: a previously mediocre product with strong market traction will skyrocket in value as a result of its own success, while offering only nominal rewards to its early pioneers.