Value Employee Equity Compensation
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When it comes to employee equity valuations during the offer process, stick to dollars... and sense:
If a man showed up at your office with a great idea for a company that he was willing to give you 0.125% of, would you leave your day job and work for him for free?
To most of us, an eighth of a percent sounds like an awfully small number.
But if that man is Bill Gates and that company is Microsoft then its $318 Billion market cap makes your 0.125% worth a little over $397 Million.
The percentage that you're offering your employee, your attorney or your accountant will . . .
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I thin this article (click the link to get to the entire thing) provides a perspective of equity compensation that equity compensation professionals sometimes forget.
The number of shares does not matter. The exercise price does not matter.
The percentage of ownership only matter in relation to the over all value of the company.
The total value of the award/grant only matters as it is relative to the growth potential of the underlying instrument.
This is not only true of small companies, VCs and start-ups. It is just as valid for publicly traded companies. I don;t think we do enough to explain the potential value (especially as it changes), the risks of holding or the risks of transacting awards. We do our participants a great disservice when we under-communicate and under-educate.
Financial Education and ongoing support and communication for the values, risks and potential of equity awards should be a higher priority (and a funded one).
Your thoughts?
As rightly pointed out, only the number or exercise price doesn't make sense. The value underlying the options makes more sense if and only if the growth potential is conveyed to the grantees. Before granting the options grantees should get the clear idea of the value they can create, the risk they undertake while carrying the instrument.
Whether you take quantity or value in dollars, what matters is the value that will be generated. Same number of shares may have value of $200000 or $500000 after certain years depending upon the company growth which is ultimately the output of employee performance. So the excess compensation is justified.
"Financial Education and ongoing support and communication for the values, risks and potential of equity awards should be a higher priority (and a funded one)."
Dan:
I agree 100% with your idea above. Below is a link to a slideshare article on the subject of value and risks, although I discuss hedging strategies a bit.
http://www.slideshare.net/OLAslideshare/march21-2009thisarticleisaboutsomething1
I would be happy to spend a weekend teaching a seminar in the Bay Area for anyone who is a grantee or administrator or financial advisor free of charge, if you wanted to arrange it.
I used to live in Marin
John Olagues
504-305-4449
olagues@gmail.com