I've got options!

There's a mad rush for stock options at high-tech start-ups. But just because people want them, doesn't mean they know what they're worth.
Posted November 1, 1999
By

Mary Brandel


(Page 1 of 2)

In this article:
Getting to know options
How much is a lot?
A whole new world

How many of you know someone--a friend, family member, or coworker--who has joined an Internet-based, pre-initial public offering (IPO) company? Perhaps you know what business the start-up is in; less likely, you've been told about the management team's former accomplishments. But most definitely you've been told, in the breathless words of someone imagining himself or herself a millionaire, "and they gave me stock options!"

Getting stock options today is like getting a trip to Las Vegas and front-row tickets to an exclusive show, all wrapped up in one package. For those initiated into this fast-growing club, there's some measure of status in being in on the latest high-tech trend, and it's pretty entertaining to imagine your riches if the best-case scenario--a successful public offering--comes to pass, even if it is just a big roll of the dice.

However, they're past the initial thrill of getting options, a lot of people don't really know what it's all about. "Especially in the high-tech sector, there's a lot of hype around options," says Ed Carberry, director of communications at the National Center for Employee Ownership in Oakland, Calif. "A lot of people don't understand what [stock options] are, except to know that they want them."

For instance, how many options are "a lot" vs. "a little"? How do you cash in on them? Can they be considered "real money"? Especially for anyone in the business of hiring IT employees, these are important questions to know the answers to, whether your company is offering stock options or competitors are luring away your talent with them.

Getting to know options

There are lots of stock option plans with many different variables. Put simply, a stock option gives employees the opportunity to buy a certain number of shares at a set price for a certain amount of time. For instance, Carberry says, an employee might be given the right to buy 100 shares of stock at $100 per share for up to 10 years. Over that time period, employees hope the share price will rise so they can purchase the stock at the lower price and sell at a higher price. Maybe eight years later, the shares are worth $175, and the employee can buy them at $100. Or maybe the shares will be worth only $75, in which case the employee probably wouldn't buy any.

Of course, in a pre-IPO company, the stock is worthless until it can be sold; for most high-tech start-ups, that means when the company goes public or is acquired.

There is no guarantee, though, that either event will happen. For every successful start-up, there are many others that fail. "Employees at start-ups are gambling that the company will do well enough to be acquired or go public. But there is this notion that you just have to get the job with a start-up and you'll make millions of dollars through options," Carberry says.

The other limitation is that options are usually subject to a vesting schedule, or a time period in which the employee has to wait before being able to buy and sell shares. There are many different schemes with different rules, but the most common formula allows employees to exercise one quarter of their options every year for four years. In other words, they can exercise the first 25% of their options on the first day of their second year of employment. They can exercise the remaining 75% over the three following years, either 25% each year, 1/12 each quarter, or some other incremental fashion.




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