How Startup Options and Ownership Work
The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options).From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed:- Company gets acquired, new terms are put into place.- Company gets acquired, company isn't good fit.- 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- If you have stock options and are an employee of a early stage startup, chances are you don't have the liquidity to exercise it. You'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.- If a company goes out of business- if A company stays private and doesn't offer an internal marketThere are only a very few cases where employees with options are taken care of:- Company sells and ensures there are triggers in the options
- Company extends exercise period- 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 sharesWe have a romanticized view of options because Google, Microsoft, Apple, Twitter, Facebook, and a handful of other companies have hit the bigtime; but that's the huge exception, not the rule, and yet we allow companies to treat options as equal to salary, and they're not.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't do that. At best, options are a placebo.