They can also be smoke and mirrors, or a pea under a whole bunch of walnut shells. The classic stock option is an option to buy a share of stock at a specified price.
How to Make Startup Stock Options a Better Deal for Employees
Say you get to buy some number of shares for a penny each. If those shares are worth meaning they can be sold legally for more than that penny, you make money. In theory. Understand the basic numbers on shares in a company: charters specify how many shares there are, and if you know that number then you can guess startup options a share is really worth by dividing what the company might be worth by the number of shares outstanding.
None of this matters until a company is actually traded.
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Call that a liquidity event, and investors call that the exit. Meaning that it was pretty hard to sell them; usually impossible.
Shares can also be worth money when a big company buys a startup. If the buyer pays cash, then people with options get to cash in as long as their option price is lower than the per share price of the acquisition.
These days IPOs are extremely rare, so exits are usually by acquisition. There are a lot of legal restrictions.
Part 1: Startup stock options 101
Stock options have been abused for years. So startup options government watches them very carefully.
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Issuing stock options takes some legal work. People get fooled by stock options.
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I know someone who left startup options company to go work for another because the second one gave lots of stock options.
It felt like a lot of ownership, but there was no chance the second company was ever going to succeed and achieve an exit. So options can end up being like shiny things to lure people, with very little value. When you get startup options stock options in a startup, you have some tax choices to make. Your share percentage can change. You might have options forshares in a company that has 10 million shares outstanding.
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But sometimes that same startup options can issue new shares and bring in new investors in a way that dilutes your option shares. So they decide to get investors in by giving startup options 10 startup options shares and they just issue those shares. Your 1 percent just became half a percent.
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- Understanding Startup Stock Options
Companies that startup options away options too easily can hurt their capital structure. If a lot of consultants and advisers and accountants and lawyers are getting compensated for their professional work with stock options, then investors are less likely to value the stock. A lot of startup business plans try to define how much stock ends up in the hands of founders, employees and investors. Startup options best use of stock options in a startup mode startup options as a message.
That included some people who were very low on the pay scale but had been given options early.
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- Part of the problem is the sheer amount and complexity of information required to understand equity and ownership in the first place.
Stock options are normally vested over a period of time, rather than given all at once. Options are not really yours until they are vested.
For example, options might be vested over two years. Vesting makes a big difference. Was this article helpful?
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Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference. Restricted stock is different than stock options and is treated differently for tax purposes. Stock option grants are how your company awards stock options. Your stock option agreement should also specify its expiration date.
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