Earning an out-of-this-world living in the Internet Economy is all about how much you can grab in the stock scramble. Unfortunately, no formula says, "If you're a VP, you get X number of shares." And not all shares are created equal. Company sizes and fundings vary widely.
A seed-stage company with few employees has higher risks and can offer higher equity compensation than a post-VC-funded company or a public one. So what do you do? Stock up on knowledge of your value, your employer's financial details and the way options work. Here's a guide to the wonderful world of options.
FIGURE OUT YOUR CURRENT MARKET WORTH
Sites like Exec-U-Net's salary watch can give you an idea of the base salary you can command. "The Internet is so hyped and so psychedelic," says Dave Opton, Exec-U-Net's executive director. "Candidates have to do their due diligence." Exec-U-Net's site can tell you, for example, that a high-tech director of marketing or business is generally worth $80,000 plus equity. But negotiating how much equity is your challenge.
Do you have options in your current job? If you do, let those guide you in determining how many options to ask for. If you don't have options, think about your current salary and what your position will be in the new company. If you are getting a better title, but the company can't match your salary, make sure you are compensated with options. For instance, if your salary requirement without stock options is $80,000, you might take $60,000, if you believe your options will equal more than $20,000. Recruiters say your compensation from options should be higher than if it was included in your weekly paycheck, because of the wait involved. Besides, your work will make the stock more valuable, anyway.
When Jeff Skoll signed on as one of eBay (EBAY)'s first employees, he took a salary of just $30,000 in his first year and got bumped up to $96,000 the next year. But he really made bank when the company went public last year and he became a paper billionaire to the tune of $1.3 billion.
LOWER YOUR CASH EXPECTATIONS
It can pay to be less greedy in the short term, especially with Internet companies. Consider the long-term value of options. If you believe in the company's business model, why not take a higher ratio of equity to cash? This may mean you collect a small paycheck, but with some companies, it would even pay to draw no salary and take it all in stock options. Cisco (CSCO)'s John Chambers and Yahoo (YHOO)'s Tim Koogle take most of their compensation in options. Viacom (VIA)'s Sumner Redstone takes 100 percent of his compensation in options. Few people can afford to give up their cash salaries, but early-stage shares may have a bigger long-term payoff than greenbacks.
If you are one of the top four or five employees, it's fair to ask for 2 percent to 5 percent ownership of the company. Buzz Schulte, managing director of Korn/Ferry International (KFY), points out that CEOs can command a larger percentage - 5 to 6 percent, or 8 percent to 10 percent if a company just got funded. Korn/Ferry recruiter Jeff Hocking stresses that the closer a company gets to an IPO, the less of the company is available, but he thinks senior VPs can generally ask for something within the 0.25 percent to 3 percent range. Though many recruiters stress the importance of the percentage, Gregg Grossman, a recruiter at Pathway Executive Search in New York, disagrees. "People take a wrong turn when they hone in on the percentage," he says. After all, 99 percent of a worthless company isn't much.
Stephanie Davis is a recruiter at Los Angeles-based Morgan Samuels who is working to fill a position right now at a post-VC, pre-IPO company. The right candidate will have two options when it comes time to talk salary: $120,000 cash plus 20,000 equity shares, or $80,000 and 40,000 shares. Davis says opting for the latter package is the smart move in this case, because the company is nearing its IPO and the shares are already worth far more than the cash difference.
DETERMINE THE VALUE OF THE COMPANY AND THE POTENTIAL VALUATION OF ITS SHARES
With a post-IPO company, this is a breeze. Open up your newspaper or look up stock quotes online. The stock price and recent history should help you guess where the stock will be at the end of each vesting period. Some sites also provide research reports by stock analysts who offer projections on where the stock will be in the future.
If it's a pre-IPO company, however, you are in for more research. Try to find out about the company's financing: how much and where it came from. Gauge the buzz by reading industry articles, talking to others in the field and conducting research in the library or on the Web. You want to find out the size of each investor's stake in the company. For instance, if a VC firm invested $10 million in a company for a 25 percent stake, the company is valued at $40 million. This information is useful when you find out how many shares there are in the company. Using this same hypothetical situation, if there are 4 million shares, then each is worth $10.
Compare the current strike price - the market value of the company's stock when the options are granted - with the strike price six months ago or one year ago to calculate what you think they'll be worth in one year. If the strike price was $2.50 six months ago and is now $5, you might hope the stock will be worth $10 in another six months and $20 in a year - if the market stays strong.
DON'T BE SHY
It might be hard to find out the current strike price before you receive a formal offer, but once an offer is on the table, start quizzing your potential employer. "You never have more power than when you are considering an offer," says Ben Slick, president and CEO of PeopleScape. If you're working with a recruiter, ask them for some help. Recruiters typically have complete information on how a client's stock is valued and can help you negotiate fair shares.
Without the help of a recruiter, you can assume that a share of a successful Internet company will be worth at least $10 sooner or later. Recruiters say that companies offering equity expect candidates to ask about their financing. "It's probably easier to talk about options than base salary in an early-stage company," points out Korn/Ferry's Schulte.
Davis agrees that it's OK to talk about options. She suggests that candidates ask companies to help them understand how they are evaluating their equity - specifically, what value was attributed to recent hires' shares.
It's also important to know which round of financing a company has reached. If it's an early-stage company, you can probably get a higher percentage of the company or more shares. If it's in a later stage, consider who is doing the funding. If it's the same firm that ponied up for the earlier round, that could be a sign of the VC's continued faith. If strategic partners (competitive or complementary companies) are investing, it's a sign the market is behind the company. If you know that the company has hot prospects, you can count on it going somewhere and your options being worth something.
Grossman advises candidates to ask about exit strategies and ask prospective employers to determine what the company will be worth when it goes public or gets acquired. This will indicate what the options could be worth someday. Other questions to ask: How many shares exist? How many are outstanding? How many are authorized for employees? What's the burn rate? This will help you learn the size of the pie, what slice you can expect and the financial strength of the company.
FIGURE OUT YOUR BEST-CASE AND WORST-CASE SCENARIOS
Davis recommends you calculate the price a year down the line, while Grossman says you should think four years down the road. But only you know how long you are likely to stick around. Figure that into the equation. Try it like this:
Let's say you were granted 20,000 options with a $5 strike price. If you are vesting quarterly, and a fourth of your options vest after one year, you'll have vested 5,000 shares after one year. If the price at that time is $20, you'll pay $5 to exercise those options. So you've made $15 dollars on each share, or $75,000 total. Not a bad addition to your yearly salary. Hopefully, the value of those shares will increase as you further vest - while your strike price remains the same.
Of course, not every company makes it big, and taking options instead of cash represents a risk. Ask yourself this: If the stock is worth nothing after two years, will you have gained career equity? If it's a startup, the answer is probably yes. In the Internet Economy, working for a failed startup is almost like a badge of honor. That experience is valuable even if the options themselves aren't.
NEGOTIATE THE TERMS AND THINK ABOUT OTHER BENEFITS
According to New York-based headhunter Sunny Bates, a handful of senior officers can negotiate accelerated vesting schedules. Even better, when a company gets acquired, shares often vest immediately.
The other thing you may hear about is "antidilution," meaning that, when more investors come in, the size of each stake dilutes. Recruiters say not to worry about it, since there's nothing you can do, anyway. On the upside, if the company is still getting funded, more money means the pie gets bigger. Maybe your percentage slice gets smaller, but it's now a tastier bite.
UNDERSTAND THE TERMS OF YOUR OFFER
Once you've negotiated an acceptable number of shares, know what you are signing your name to. Are you getting nonqualified stock options or incentive stock options? NSOs give your employer tax advantages. ISOs have certain restrictions: You cannot sell your shares until one year after the exercise date and two years after the grant date, and only $100,000 worth of options can be exercised each year. Most people get ISOs, but unfortunately employees have no say which of the two they get.
Know what your vesting schedule and cliff rights are (see glossary). This knowledge will help you feel comfortable signing your name on the dotted line. After all, if you are going to be wearing golden handcuffs, make sure they are as comfortable as possible.
STOCK OPTION LINGO
You're on the other side of your potential employer's desk, discussing your comp package. Here are some terms to make you sound really smart.
Vesting period
Option grants usually have vesting periods. Your ability to cash in your options for stock comes in phases. Companies typically set a three- to five-year vesting period, with equal portions of options ready to be cashed in after each phase, most often a year. Note: Even if your options vest over four years, you will probably have more than four years to exercise your options. Incentive Stock Options expire after 10 years.
Vesting schedule
Make sure you find out how many times a year options actually vest. Options normally vest once a year or twice a year, although some companies offer monthly vesting schedules.
Cliff rights
Vesting may also involve a "cliff," which restricts all exercising of options for a fixed period of time. You may not be able to cash in any vested option until you have reach your one-year or two-year cliff mark.
Lock-up period
Once a company goes public, there is usually a lock-up period. Employees cannot resell shares for a certain period of time.
Deep-in-the-money options
This means your options are valuable. Your strike price is below market value, so you are making money on each option you exercise. If the price is $4 a share and the shares are trading publicly for $12, then your deep-in-the-money shares are making you $8 a share.
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