It’s easy to get freaked out when it comes to choosing stock options as an employee, but Jan Řežáb has broken down all we need to know about stock options for tech and startup teams so that you know the best questions to ask and all the mistakes to avoid. Jan certainly knows what he’s talking about, having made over 26 million for his employees, so it’s time to listen in and get to grips with all you need to know.
In order to negotiate stock options as an employee there are a few key pieces of terminology you need to know before you get started.
ESOP – Employee stock options.
Grant – The allocation of options to an employee.
Vest – When certain criteria are met an option will ‘vest’ meaning the employee will be able to exercise them.
Exercise – When an employee exercises their right to buy their share at the agreed price.
Sale – An employee sells the share.
Vesting frequency – Usually no options will vest within a year to allow to company to adjust for mis-hires.
ESOP Speed types – There are three ways companies can choose to release stock options: Traditional, backloaded and performance – each method has its own pros and cons.
Another important piece of basic information you need to know is that within tech startups, you are likely to be given an average salary, but alongside stock options that could give you the opportunity to potentially make millions if there is a big exit.
Of course, during his presentation, Jan is able to get into much more detail and give real-life examples to the audience of how these terms affect stock options and what decisions you can make to get the best possible outcome for yourself.
What is the value of the stock?
Before you start trying to work out the price of your stock, Jan goes through with us what you can and cannot ask for.
The two big questions that shouldn’t be asked are ‘what is the value of the shares?’, simply because the CEO will not know and cannot guarantee a price also, when the company is between rounds, it’s also not prudent to ask what the current valuation is either.
So what can you ask about?
Jan recommends making sure you ask the following questions:
- What was the last valuation and do you think it has increased?
- What is the total amount of issued shares today?
- Under what jurisdiction are the options offered?
- Is the stock booked inside the formal board cap table?
An overarching question that many of us want to know is, ‘ How much should you ask for?’ To answer this, two key points going forward are to understand that stocks are not unlimited and you need to understand your worth within the company.
During the presentation, Jan signposts us to an amazing calculator put together by Index ventures that is able to calculate what stock options should be available to you depending upon your position in the company. The calculator is available here.
Mistakes you don’t want to make
So, even if you’ve got your head around the basics and how to value stock, it’s still easy to fall foul of some of the common pitfalls.
Jan lists the most common mistakes to be made as:
- Too much stock for managers.
- Not enough strategic review of stock option pools.
- Employee’s not discussing stock options with leaders enough.
- Overall lack of knowledge when it comes to stock option pools.
- Stock often gets taxed as employee bonuses and not as capital gains which it should be.
‘How do I avoid these mistakes?’ you might be asking yourself, well, Jan explains in simple form the easiest way to avoid these pitfalls is to ask the CEO during discussions why you are in receipt of the amount of stock you are being offered and ensure you ask them to review how much you will be in receipt of every 1-2 years. Jan also recommends enquiring further about how ESOP is structured in your business from a tax point of view and finally, it’s important to try and find the right balance between stock and salary.
To sum up, all the information given in the presentation, Jan urges us to bear in mind the following three key points; spend time knowing and understanding stock in general, as well as taking on board points that may be specific to you and your company, do your due diligence and ensure the company is properly set up for stock options and finally, be prepared to give the company your best – meaning the company will return the favour and give their best back to you.
Jan’s talk demonstrates practical tips that any employee can take away and use to make informed choices about the stock options available to them. You can learn even more by watching the full presentation where Jan goes into even more detail on the topic and answers all your burning questions on the topic surrounding ESOP and your options as an employee.