Start-up happy (and option primer)...
I have worked for a number of start-ups. I cannot recommend them enough...if you are young, single and looking for excitement. I am no longer that way (really, I think I strike out on all three counts these days). A start-up is a great place to grow, and possibly hit a financial home run.
When I left my first start-up in the end of 2000 (shortly after I got married) I was given three months to purchase the shares that had vested. For those of you who do not understand the shares process, I shall try to clarify it here.
Often times, in order to entice potential employees to join a company, that company may offer stock options. Stock options grant the holder the right to purchase stock at a future date for a price that is determined by the board of directors of the company. This "strike price" is suppose to accurately reflect the current value of the company's stocks. The idea is that the company will grow, and therefore the value of the stock will grow too. Your option contract is a contract to purchase stock at the "Strike price" for a given period of time no matter what the actual price of the stock may be in the future. So if the price does go up, then you can "exercise the options" (buy the stocks) at the price on the option contract and sell them at the current price. The difference is your profit.
An example would be starting with a company and they offer 2500 options based on the board of directors approval. The options may not be priced yet because the board has not voted on approving them yet. If the potential employee accepts the position, and becomes an employee, the board will meet and set a price for the options. Again, this price should accurately reflect the current value of the company, but this is often times difficult to figure out. This price sticks with the options for the duration of the contract, generally 10 years, or within some period of time after the employee leaves the company, which ever comes first.
If the start-up is lucky enough to "go public" and is allowed to list their company on one of the exchanges, the shares become much more liquid. While it is possible to exchange shares of a non-publicly traded company, it is not easy. Once the shares are listed, the marketplace then dictates the fair market value of the company. If all goes well, this price is higher than your strike price.
When you want to capitalize on your gains, the difference between your strike price and the share price, you simply purchase your options, and sell the shares. This can often times be done in the same transaction.
Vesting is an important part of the puzzle. I have not included that yet. Typically, when options are granted, there is a vesting period. A options contracts usually lays out a time frame for the options to become viable to be purchased. The length of time varies, but in the Silicon Valley, I have typically seen a 4 year vesting period.
In general, for the first 364 days, not one share vests. This means that if you leave the company before a year, you can not take advantage of the options that were offered to you. On the 365 day, or after one year a large percentage will vest, in my case it has always been 25%. Over the next 36 months shares continue to vest at the end of every month, typically at a rate of 1/48 of the total options offered. If you leave before all of the shares are vested, the company will use a formula similar to this to figure out the number of options that have vested.
Smart companies will continue to offer options throughout the employees career. By doing this, the employee has added incentive to stay with the company because more shares are vesting all of the time.
back to my story...
I had three months after I left the start-up to purchase my options. The company's stock had a 2:1 forward split since I started and was granted the options. This stock split meant that every stock or option to buy a stock had doubled in number, but the price was cut in half, thereby leaving the value intact. Twice as many, each one at half the price.
I did end up purchasing my options, and turning them into shares. Of course, these were shares of a company that was not publicly traded, so they were really virtually worthless. But, I had faith that this company would someday make it. They had good technology and they had a market, I just needed to sit and wait.
When all was said and done, I ended up with 30,000 shares (total number vested leaving about 40,000 on the table unvested), and each one cost me about $0.15. This was a total outlay of $4500.00. At the time, I was sure that it was a good move. As time progressed, I was not so certain...
Stick with me as I continue to outline my financial successes and failures and see what happens to this company, my stocks value and how it helped or hindered my progress.
Until next time,
Thejester
When I left my first start-up in the end of 2000 (shortly after I got married) I was given three months to purchase the shares that had vested. For those of you who do not understand the shares process, I shall try to clarify it here.
Often times, in order to entice potential employees to join a company, that company may offer stock options. Stock options grant the holder the right to purchase stock at a future date for a price that is determined by the board of directors of the company. This "strike price" is suppose to accurately reflect the current value of the company's stocks. The idea is that the company will grow, and therefore the value of the stock will grow too. Your option contract is a contract to purchase stock at the "Strike price" for a given period of time no matter what the actual price of the stock may be in the future. So if the price does go up, then you can "exercise the options" (buy the stocks) at the price on the option contract and sell them at the current price. The difference is your profit.
An example would be starting with a company and they offer 2500 options based on the board of directors approval. The options may not be priced yet because the board has not voted on approving them yet. If the potential employee accepts the position, and becomes an employee, the board will meet and set a price for the options. Again, this price should accurately reflect the current value of the company, but this is often times difficult to figure out. This price sticks with the options for the duration of the contract, generally 10 years, or within some period of time after the employee leaves the company, which ever comes first.
If the start-up is lucky enough to "go public" and is allowed to list their company on one of the exchanges, the shares become much more liquid. While it is possible to exchange shares of a non-publicly traded company, it is not easy. Once the shares are listed, the marketplace then dictates the fair market value of the company. If all goes well, this price is higher than your strike price.
When you want to capitalize on your gains, the difference between your strike price and the share price, you simply purchase your options, and sell the shares. This can often times be done in the same transaction.
Vesting is an important part of the puzzle. I have not included that yet. Typically, when options are granted, there is a vesting period. A options contracts usually lays out a time frame for the options to become viable to be purchased. The length of time varies, but in the Silicon Valley, I have typically seen a 4 year vesting period.
In general, for the first 364 days, not one share vests. This means that if you leave the company before a year, you can not take advantage of the options that were offered to you. On the 365 day, or after one year a large percentage will vest, in my case it has always been 25%. Over the next 36 months shares continue to vest at the end of every month, typically at a rate of 1/48 of the total options offered. If you leave before all of the shares are vested, the company will use a formula similar to this to figure out the number of options that have vested.
Smart companies will continue to offer options throughout the employees career. By doing this, the employee has added incentive to stay with the company because more shares are vesting all of the time.
back to my story...
I had three months after I left the start-up to purchase my options. The company's stock had a 2:1 forward split since I started and was granted the options. This stock split meant that every stock or option to buy a stock had doubled in number, but the price was cut in half, thereby leaving the value intact. Twice as many, each one at half the price.
I did end up purchasing my options, and turning them into shares. Of course, these were shares of a company that was not publicly traded, so they were really virtually worthless. But, I had faith that this company would someday make it. They had good technology and they had a market, I just needed to sit and wait.
When all was said and done, I ended up with 30,000 shares (total number vested leaving about 40,000 on the table unvested), and each one cost me about $0.15. This was a total outlay of $4500.00. At the time, I was sure that it was a good move. As time progressed, I was not so certain...
Stick with me as I continue to outline my financial successes and failures and see what happens to this company, my stocks value and how it helped or hindered my progress.
Until next time,
Thejester
posted by Thejester at 1:09 PM
0 Comments:
Post a Comment
<< Home