Negotiating Stock Option Packages - Monster.com

by Michael Chaffers
Monster Contributing Writer

http://career-advice.monster.com/salary-negotiation/Negotiating-Stock-Option-Packages/Home.aspx

Stock options are often used as a means for startups to attract
talent and for individual employees to claim some of the value created
by those companies. Therefore, it is increasingly common for
compensation offers to include both a base salary -- usually less than
what established firms pay -- along with stock options.

Unfortunately, unlike base salaries, there is little market data
about typical stock option packages for different positions. So what
can you do to ensure you have a good deal? Here are six tips:

1. Don't Forget Basic Negotiating 

Realize that while negotiating stock option offers can be difficult,
they should be approached with the same strategies and care that you
use to negotiate any other deal. Focus on your interests, think
creatively and make sure that you can justify any offer you accept as
reasonable and appropriate given what others of similar skills make in
the market.

2. Learn from Your Network

Because there is so little available data, coming up with useful
formulas or benchmarks is very difficult. So instead of relying on the
Web, use your personal contacts. If you know attorneys, venture
capitalists, accountants or journalists who are familiar with your
industry, chances are they know typical compensation packages. As a
general rule, the top employees of a company, especially the CEO, are
typically offered significantly higher percentages of the company
(perhaps 2% to 4% for the most valued officers, and maybe up to 10% for
CEOs). VPs can expect somewhat less (0.5% to 2%), and everyone else
gets even less.

3. Understand the Value

While all options have some potential value, their value to you
depends on a series of factors. Some of these factors have to do with
the terms of the option, and are therefore negotiable. These negotiable
factors include the vesting schedule of the option, restrictions on
exercising the options once they have vested and the strike (or
exercise) price. Typically, stock option packages fully vest after four
years and a certain percentage vest every 12 months.

Non-negotiable factors have to do with the value of the company --
such as the company's most recent valuation, whether that valuation has
increased in recent financings, how close it is to going public, the
quality of its investors and the value of its underlying technology.

4. Know What You're Giving Up

Ask someone to help you value the options so that you can compare
them to salary you are forgoing. Remember that stock options do not pay
your bills or feed your family. Since you are often asked to forgo hard
cash for them, you really need to figure out if this is a reasonable
trade-off for you -- given your appetite for risk and your financial
situation. The CFO, HR directors and any executive recruiters you are
using can be quite helpful in these deliberations. Do not hesitate to
ask them to help you understand the value of the offer. Generally
speaking, while you will likely receive more options if you are hired
before the company attracts venture capital funding, your options are
worth more the closer the company is to going public.

5. Consider the Job Itself

Putting aside the lure of stock options, ask yourself how well this
job will satisfy your other interests? If the stock turns out to be
worthless, will you still gain valuable experience, make a reasonable
amount and receive the benefits that matter to you? Since most
companies do not strike it big, most employees do not get wealthy from
their options. They are an important piece of your compensation, but in
most cases should not be the most important piece.

6. Think Creatively

If you disagree about the stock options offered to you, think of
creative ways to bridge the differences. If the numbers being offered
feel too low, you can always look for ways to receive more based on
performance, tenure or other factors. (Think of a bonus paid in stock
options, not cash.) If the terms of the stock options upset you,
consider a provision that automatically changes the offensive term once
you achieve a certain milestone -- title, tenure or performance-related
achievement.