Stock options vs salary

The better strategy with stock options. Stock options are an excellent benefit — if there is no cost to the employee in the form of reduced salary or.
Table of contents

But 21 st century companies face compressed technology cycles, which create the need for continuous innovation over a longer period of time. Who leads that process best? Often it is founders, whose creativity, comfort with disorder, and risk-taking are more valuable at a time when companies need to retain a startup culture even as they grow large. With the observation that founders added value during the long runup in the growth stage, VCs began to cede compensation and board control to founders. While founders in the 20 th century had more stock than the rest of their employees, they had the same type of stock options.

Rather, when a startup first forms, the founders grant themselves Restricted Stock Awards RSAs instead of common stock options.

How to think about stock options when you’ve got a job offer from a startup

Essentially the company sells them the stock at zero cost. In the 20 th century founders were taking a real risk on salary, betting their mortgage and future. Founders take a lot less risk, raise multimillion-dollar seed rounds, and have the ability to cash out way before a liquidity event. Early employees take an equal risk that the company will crater, and they often work equally as hard. Consider that the median tenure for an employee in a startup is 2 years.

Equity vs. Salary in Tech: What's the Difference?

So why should non-founding employees of startups care? There are four problems:. VCs have intentionally changed the more than year-old social contract with startup employees. At the same time, they may have removed one of the key incentives that made startups different from working in a large company. In the past, founders and employees were aligned with the same type of common stock grant, and it was the VCs who got preferential stock treatment.

The founders and very early employees have preferential stock treatment and the VCs have preferred stock. Add to that all the other known negatives of a startups: no work-life balance, insane hours, inexperienced management, risk of going out of business, etc. That said, joining a startup still has a lot of benefits for employees who are looking to work with high-performance teams with little structure.

Stay in Touch

Your impact will likely be felt. Constant learning opportunities, responsibility, and advancement are there for those who take it. For later employees, offer what are called restricted stock units RSUs. The lower the strike price, the less you have to pay to own a share of company stock. But to keep employees engaged, they ought to be allowed buy their vested RSU stock and sell it every time the company raises a new round of funding.

First things first: The nuts and bolts

Investors and founders have changed the model to their advantage, but no one has changed the model for employees. Moving the liquidity goal posts may have removed the incentive for non-founders to want to work in a startup versus a large company. You have 1 free article s left this month.

You are reading your last free article for this month. Nonqualified stock options NSOs in which the employee must pay infome tax on the 'spread' between the value of the stock and the amount paid for the option. The company may receive a tax deduction on the 'spread'. How do Stock options work?

An option is created that specifies that the owner of the option may 'exercise' the 'right' to purchase a company's stock at a certain price the 'grant' price by a certain expiration date in the future.

Usually the price of the option the 'grant' price is set to the market price of the stock at the time the option was sold. If the underlying stock increases in value, the option becomes more valuable. If the underlying stock decreases below the 'grant' price or stays the same in value as the 'grant' price, then the option becomes worthless. They provide employees the right, but not the obligation, to purchase shares of their employer's stock at a certain price for a certain period of time.

Options are usually granted at the current market price of the stock and last for up to 10 years.

To encourage employees to stick around and help the company grow, options typically carry a four to five year vesting period, but each company sets its own parameters. Advantages Disadvantages Allows a company to share ownership with the employees. Used to align the interests of the employees with those of the company.

In a down market, because they quickly become valueless Dilution of ownership Overstatement of operating income Nonqualified Stock Options Grants the option to buy stock at a fixed price for a fixed exercise period; gains from grant to exercise taxed at income-tax rates Advantages Disadvantages Aligns executive and shareholder interests. Company receives tax deduction. No charge to earnings. Dilutes EPS Executive investment is required May incent short-term stock-price manipulation Restricted Stock Outright grant of shares to executives with restrictions to sale, transfer, or pledging; shares forfeited if executive terminates employment; value of shares as restrictions lapse taxed as ordinary income Advantages Disadvantages Aligns executive and shareholder interests.

No executive investment required.

Employee stock options: A compensation strategy for your startup - MaRS Startup Toolkit

If stock appreciates after grant, company's tax deduction exceeds fixed charge to earnings. Immediate dilution of EPS for total shares granted. Fair-market value charged to earnings over restriction period.