Opting for Stock Options

Opting for Stock Options

With the NASDAQ hitting new highs almost every day, and constant news stories of overnight IPO riches, the lure of big stock options has proven almost irresistible. Attorneys are leaving law firms for corporate law departments at unprecedented rates in hopes of snagging future big bucks. Until recently, law firm lawyers would jump at the opportunity to accept virtually any in-house position. These days, however, potential candidates are turning up their noses at jobs with mature companies, preferring to wait for the pre-IPO opportunity that will offer them huge stock options to make them instant millionaires. But, how realistic are these expectations? And, are a start-up's stock options always more valuable than those of established public companies?

For several decades, stock options have been a persuasive incentive for top lawyers to join public companies. These days, they are an increasingly important component of many newer, often private, in-house compensation packages. From the employer's point of view, offering generous stock options allows a cash-strapped start-up to offer a lower base salary. Options also tie the employee's salary potential to the success of the company as a whole. By setting a vesting schedule over time, the employer has a better chance of keeping employees for at least three to five years and encouraging their consistent top effort in order to drive up the stock price. From the potential employee's perspective, stock options offer the ability to negotiate an incredibly lucrative total compensation package well in excess of what the company would be able to pay up front. But, there is a risk that the upside may not materialize.

Just about every industry is rushing into the IPO market, but it is important to keep in mind that a pre-IPO company may never actually go public. And, even if it does, there is no guarantee that the IPO will be successful. There are enough success stories out there, nonetheless, to keep hopes up. And, there is real potential to make a killing. So, how do you evaluate the probability of striking it rich when made an offer that might be too good to be true? A candidate must do careful due diligence before accepting this risk. A savvy candidate will investigate the following:

How marketable is the company's idea, service, or product?
Are there entrenched, well established competitors in the field?
Who are its competitors, and how are they doing?
If already a public company, what is the stock's history?
If private, is the company in the early or later stages of start-up?
How likely is an IPO, and when would it occur?
What type and caliber of investors, if any, has the company attracted thus far?
What are the backgrounds and track records of the founders and management?
Are they working substantially for stock?
How well is the company currently being managed?
How is the company actually performing?
How many shares or options are currently outstanding, if any?
At what price have previous options, if any, been issued?
At what price would future options be issued?
At what price have IPO's of similar companies been issued, and how did they fare?

Even if the answers to all of the above indicate that accepting stock options would be a good risk, remember that they do not pay your bills currently. Hence, only accept them if they vest and are valuable and liquid immediately, or you are financially able to cover your expenses for the foreseeable future solely on the cash component of the compensation package being offered. If you can live on the guaranteed base salary, really believe in the company and its chances of success, and are confident that you can make a meaningful contribution, go for it! Keep in mind that a start-up company can afford to be much more liberal with stock options than cash, so don't be shy in negotiating for a generous package. You are assuming part of the risk; therefore, you should reap the rewards of your hard work.

Valerie Fontaine
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