How Startup Options and Ownership Work
The article goes over stock options; but it doesn&#x27;t address an alternate form of equity; issuing early employees restricted stock awards (instead of options).<p>From the receiver&#x27;s point of view, Stock Options are a bad deal 99 times out of 100, let&#x27;s review the cases in which owners of options get screwed:<p>- Company gets acquired, new terms are put into place.<p>- Company gets acquired, company isn&#x27;t good fit.<p>- Company gets massive amounts of funding (those Unicorns), and due to the increasing funding at each round, those with options are left with a hefty tax bill and only 90 days to exercise if they leave<p>- If you have stock options and are an employee of a early stage startup, chances are you don&#x27;t have the liquidity to exercise it. You&#x27;re also not being paid market value (since you have stock options) If you did have the capital, you could have just invested in the seed round for a much better discount and return.<p>- If a company goes out of business<p>- if A company stays private and doesn&#x27;t offer an internal market<p>There are only a very few cases where employees with options are taken care of:<p>- Company sells and ensures there are triggers in the options
- Company extends exercise period<p>- Company goes public and employees are able to exercise their options with the tax bill that goes along with that and still make money on their shares<p>We have a romanticized view of options because Google, Microsoft, Apple, Twitter, Facebook, and a handful of other companies have hit the bigtime; but that&#x27;s the huge exception, not the rule, and yet we allow companies to treat options as equal to salary, and they&#x27;re not.<p>I know companies face reporting requirements if they have more than 50 shareholders; but the earliest employees should be compensated in a way that respects their sacrifice and risk; and options don&#x27;t do that. At best, options are a placebo.