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What are stock options?

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An important part of evaluating a startup job offer is understanding your stock options. This week on the Commit, our CEO Brandon Kessler has some great tips that'll get you past the jargon and the hype. Things we'll discuss: stock options, grants, vesting periods, strike price, exercising your options, liquidity events, IPOs, and acquisitions.
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Text Comments (21)
NING DING (1 month ago)
First, let me answer the question at the end of the video: Because most startup CAN'T afford market salaries, so they prefer to use stocks as an exchange. Why they can't afford? It's obvious, they are STARTUP, meaning they are poor. Second, a question, why you guys don't mention the dividend? Let's assume I have only 1% share of the company, even though it's not going to public, but as long as the company have good profits, I can receive 1% in dividend
QuantStyle (6 months ago)
This is a scam. Stocks are not real ownership instruments. Most stocks, especially start ups, never pay dividends, and there is no monetary connection between the compnay and the shares. It's a Ponzi asset traded between investors.
U.H. D. (7 months ago)
Wondering if anyone can answer this. My wife's company is going public. Like soon. 1. She is a current employee. She will be fully vested about a month before the company goes public. 2. It is a private company that has been in business for over a decade. There is a huge new item they invented that I believe will transform a segment of the world and improve quality of life. 3. The stock options are not substantial. Even if the IPO was huge it is not life changing money, but even going by similar IPOs and being conservative with a projected stock price the amount would not be insignificant. 4. Let's say she has 1,000 vested shares. Let's say the option is for $1 per share. a) when can she sell them? Not on the first day? b) is there a standard time to wait to exercise the options? Like 90 days or 6 months? Can she pay (in the example $500) the day of the IPO? c) let's say after the waiting period the stock is trading at $10 per share, she keeps 500 shares and offers her 500 on the market. Does she need to use a broker? They will take a fee...right? In this example $500 was spent on 500 shares now worth $5,000. d) I have tried to understand the tax implications. We already are in a very high tax bracket. This hypothetical $5,000 will be exposed to the new (2019...4 months in the future of writing this) capital gains tax. Since we sold within a year? And if the gain kicks out income over to the 35% tax bracket the $4500 gain would be taxed at 15%? Layman equation. $500 spent ($4,500 earned @ $10 per share with 500 shares optioned and sold) $4,500 taxed at 15%= $3,825 So...in very basic terms it is as if $3,825 popped into existence? I am not good at math and only have a 9th grade education. It takes me time to try to understand things and since I am mostly self taught (biggest regret was going the GED route and not attending a 4 year college) I often don't understand the minutiae of mathematics.
John Egan (7 months ago)
Why would this guy advise prospective developers to ask questions like "why can't this company pay market rates like other startups"!? It is ridiculous that the whole market is predicated on this imbalance where the founding team have to find capital to fund these superstar engineers. Engineers are aware of the risk, it is a shared risk and mostly if there is an employee share scheme, a shared win for everyone at the end if either Exit or IPO. In response to the question about taking a hit on salary vs increased share options, the question should be "what are you going to spend the money on that you don't pay me and how is that going to benefit the long term goals of the company". A good answer to this will indicate whether those share options are actually going to be worth anything in the long term.
Langa (1 year ago)
Hello! Thanks so much for such a enlightening video. Quick question, I always hear options pool, stock options, restricted stock whats the difference in all these three?
William Dahm (7 months ago)
Options pools are basically reserves of equity in the company. Stock options are used for showing this equity. These options are then given to future employees that join the company. This method is designed by a company to attract talent to join the company. Stock/Options are simply the ability for an employee to buy equity in a company at a discount and with the right to exercise or not exercise (purchase) at the vesting date. Depending on the type stock/option granted, there can be varying tax treatment. Common types of stock/options are: RSUs, ISO, NQ. An RSU stock/option, or a "restricted stock unit," offers an employee the ability to purchase equity in a company with either no exercise cost or a specific exercise discount. The exercise price at this time can also be the FMV at the date of grant. Taxation will occur immediately on RSUs the date of vest.
Adam Bk (1 year ago)
Question: do I get any money while holding on to these options or is it just "sitting" there waiting for the company to go public...either than future value, do I get ay money? monthly? quarterly? idk. whats the point in just holding options for a private company that will (most likely) not go public? thanks
Wildboy789789 (7 months ago)
Private shares are tied to the value of the company, that's the only benefit... if a company goes public, it makes a public offer for current company value, once the stocks go public they are no longer tied to the value of the company... public stocks are only a bet, they go up when people buy them because theres less of them, and down when people sell them because there is more of them... public stocks are only connected to a company thru buybacks and dividends... my opinion? Unless your working at the next amazon take the cash and invest in verizon ;)
William Dahm (7 months ago)
The point of holding onto the vested options would be the belief that the share price in the future will be higher than the exercise price they granted you. Thus, if you exercise these options after holding onto them for sometime, you would expect a large profit since they have now grown exponentially compared to your exercise costs. This process still happens even if the company does not go public.
andrew horner (1 year ago)
Exactly the answers to my questions. Thanks!
Libby Thomas (2 years ago)
Thank you so much! I'm about to go into a conversation about stock options with our company accountant, and wanted to be familiar with the terminology. This was a great overview!
orangedac (2 years ago)
Excellent info
Justin Cano (2 years ago)
Are there any other ways to sell your shares other than an IPO (or when the company is bought out)? i.e., what other liquidity events are there other than IPOs? I ask this because it's mentioned that 99.9% of startups probably won't reach an IPO, so in that case, are shares essentially worth nothing?
Brandon Kessler (2 years ago)
Hi Justin, the most common liquidity events are M&A (mergers and acquisition) and IPOs. I believe for most startups that M&A is the most common liquidity event because only the most successful companies generally go public. And often these days, many companies that could go public choose not to because the process is fairly onerous. So yeah, if a company gets bought by another company for more money than their last valuation, then usually the preferred shareholders (investors) get their money first, and employees second. The higher the acquisition price relative to the last valuation the investors gave it, the better the chance is that employees will make money from their options. There are some later stage private companies that are very successful but have not gone public (like Uber, for example) where there are such things called "secondary markets" and those shares can actually be traded. Similarly, when a company is doing really well and the employees have been around for a while, the company may decide to allow employees to sell their shares to investors. But yes, given most startups fail, most startup options are and will be worthless. You shouldn't consider options to be the basis of your retirement. My advice is to pick a company where you'll get fulfilling work out of the job (learning, impact, good people, etc) AND in one that operates in a potentially big market. If your options become worth a lot of money one day, then you'll be both fulfilled by the work, and fortunate financially.
Jim Jarvis (2 years ago)
So silly. What is average time to IPO? Seven years +?, What is average tenure of start-up employee? Three years or less? That's your window. If the company goes public. Most fail or are sold to private interests. It's obvious what happens if the company fails, but, if sold privately you may or may not be able to benefit from your stock. You may just be cut out. After you have bought a potentially worthless investment which you may also have had to pay tax on. Good luck with that. Now, if you join an established company, post IPO or happen to get lucky, all is well. However, for most, all is not well. Stock options in small private companies is generally a poor deal, particularly if you "trade" salary for them. Ask the founders of THEY took their stock in the option program or have another class. Ask them why.
Sammy Kumar (2 years ago)
Great video. I was always under the impression that they gave you a certain # of stocks for free. This cleared up that you still gotta buy them.
Vikas Pandey (2 years ago)
what if a company offers me 0.1% equity and the vesting period is 4 years. Considering its a startup. I have following questions. 1) If I quit after 2 or 3 years, am I going to get any of the equity. 2) If I quit after the vesting period but the company doesn't go public and actually it is acquired by another company. So in this case, will I get get my shares as a amount. 3) Continuation to the 2nd Question, If before or end of vesting period company gets acquired by another company, will I get my worth of share as a amount. Considering I'm still working in the company. Please help me to evaluate this, because I'm confused right now, whether to work in startup or not in bay area.
Brandon Kessler (2 years ago)
Hi there, the standard vesting period of 4 years is usually structured as "4 years with a 1 year cliff," as mentioned in the video. The 'cliff' means you get zero until you stay one year, at which point 25% of your options would have vested and you can buy those. From the end of the first year, they usually vest monthly thereafter 1/36th of your total. So yes your options can be exercised as they vest, for however long you stay, according to that formula. You'll want to make sure you ask them if it's '4 years with a 1 year cliff, and monthly vesting thereafter' to confirm whether they do it that way. Once your options have vested, all that means is that you can purchase the shares at the strike price. It does not mean you can sell them. It means you've paid money for shares. If you leave, typically you have to purchase them before 90 days after leaving. Once you've bought shares, those shares are yours and you'd hold on to them until the company gets bought or goes public. If the company is bought for enough dollars to pay out all the main "preferred" shareholders (investors), then the employees and founders who have common stock get paid last usually. So you'd only get money if the sale price is big enough for everyone else to get their money first, and money is left over. If the company sells for less than what investors have put in, you won't get any money most likely. If the company gets bought while you're still working there, several things can happen. Most of the time, the acquiring company will issue new shares to retain existing employees, as few companies want to buy another company and then have all the employees leave.

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