STOCK OPTIONS AND START-UPS

December 17th, 2014 Posted by No Comment yet

You just traded in your high paying salary and a plethora of benefits in exchange for 100-hour work-weeks and a modest equity stake in a start-up company because you think you have just signed on with the next Facebook or Google.   Please keep in mind, however, that stock options do not put food on the table or pay your mortgage. They are future incentives used by small companies, particularly start-ups, to lure high-priced talent away from better paying jobs, because equity is all these companies have of potential value to offer.   What tends to get lost in the excitement of the moment is that options and restricted stock are an enticement that can be lost at a moments notice due to dilution or termination well prior to any significant corporate event.

I am not suggesting that you stay away from all start-ups or that you should turn down the options offered.  I am simply suggesting that you consider the job on its merits and not because someday, maybe, your options may be worth millions.

 

REVIEW THE EQUITY PLANS BEFORE YOU ACCEPT THE JOB

December 17th, 2014 Posted by No Comment yet

Many companies today offer equity in the form stock options and/or restricted stock as part of a new employee’s compensation package.  This is particularly true if the company is a “start-up” that uses equity to entice you to take the position because it does not have the cash flow to pay employees the salaries they deserve.

Before accepting the position, employees should carefully read the company’s equity plan and any stock agreements they will be asked to execute to get a sense of their rights in the event the relationship terminates or the company experiences a corporate event such as a sale or merger.   Any opportunity to negotiate the details of your equity award takes place before you join the company, so make sure you do your due diligence.

Areas of concern to look for when reviewing the governing equity documents include:

  • What happens to your unvested stock when if you are terminated?
  • How long do you have to exercise your vested options if you are terminated?
  • What type of options are you getting? Non-qualified or Incentive?
  • Are they Options or Restricted Stock?
  • Is there any protection against dilution?
  • Does the company have a right to buy back any vested stock or restricted stock upon my termination, and at what price?
  • What happens to my equity interests upon a Change of Control?
  • What the tax consequences are of the deal you are about to strike?
  • Does the equity plan allow for cashless exercise so that you do not have to come up with any money to purchase your vested options?

If you are not comfortable reading the plan, it is reasonable to ask the company to speak with someone who would be able to answer these questions.  Options are a wonderful compensation incentive tool and, with just a bit of knowledge, you will give yourself the best opportunity to reap their rewards.

EQUITY BUY INS

December 17th, 2014 Posted by No Comment yet

Instead of providing equity to executives in the former of options and restricted stock that vest over time, some employers ask their executives to “put their money where their mouth is” by making an equity investment in the company.  Given the current state of our economy, and the grumblings from Main Street about executive pay, this seems like a reasonable way to tie compensation to performance.

On the upside, by investing in the company an executive will feel like he/she has a personal stake in the company’s future while not having the pressure of meeting certain vesting dates.  On the downside, the executive will not have the same ability or resources to perform due diligence into the investment risk they are being asked to take on.  In addition, employees may not have the financial ability to afford the equity stake being offered, and therefore have to to take less equity or a company loan in order to accept the position.  Moreover, most stock plans give the company a right to repurchase your equity interest if your relationship ends, and at various prices depending on the reason your employment terminated.