Negotiating for Stock Options

In the mid to the late 1990's, the granting of stock options to employees became the most viable way for unknown and small start-up companies in the US to lure good people into their fold. Start-up companies usually have limited capital for cash incentives, and can't certainly match the salaries offered by well-entrenched behemoths in the industry. They, after all, need their cash even more to finance the infrastructure and equipment of their respective businesses. So they offer stock options instead to their potential hires.

Stock options are like a pot of gold at the end of the rainbow to new college graduates looking for their first job. They just need to pick the right company - the one that will come up with a revolutionary product or service and reap huge returns a couple of years down the road. Being in such a company when payback time arrives can easily make lifetime retirement affordable. The multitude of twenty-something-year-old multimillionaires at Microsoft in the 1990's was a clear example of what can happen.

Times are probably no longer as good today as when billions of dollars are being plowed into the many dotcom start-ups that mushroomed every morning at the turn of the 21st century. Although the granting of stock options to employees is still widely practiced by many big companies today, these companies are now exercising more caution in the way they grant options to employees. People likewise have become more cautious today with how they look at their options, learning from the last dotcom bubble burst that the value of stock options can be wiped out as easily as they ballooned in the first place.

Here in the Far East and in China, the practice of giving options to employees is also fast becoming popular. Although gone were the days when stock prices would appreciate by leaps and bounds in a matter of months, getting stock options is still very inviting to many professionals hereabouts.

Basic salaries in this part of the world are at a mere fraction of what companies in developed countries give. Thus, the earning potential of stock options for people in this region is quite alluring when compared to the figure written on their pay slips, even if options don't always turn up as profitable as most people think.

To many people in developing countries, getting something in US dollars 'for free', even if it hasn't happened yet, is the promise of a good future ahead of them. This notion of stock options being the key to the good life may be true in many cases, but people must also realize that this is more often not the case. At a time when job offers with stock options get attention, so must job seekers know what these options mean and how they should negotiate for them.

Don't Get Blinded

According to www.recruit-china.com, professionals and managers in China can "get blinded by the pot of gold and overwhelmed by the complexity of options", that they no longer attempt to accurately evaluate their stock options' value.

www.recruit-china.com said that these option grantees would normally do just one of the following, instead of carefully assessing their option grants: 1) focus simply on the number of options given, ignoring the complexities attached and their potential future value; 2) listen to the hype, and think that they will one day be one of those who bought Microsoft and Cisco stocks at just a dollar apiece; 3) simply say 'thank-you' and accept the offer, even if the options constitute the 'lure' that came with the low salary offer; 4) ignore tax liabilities; and 5) see options as 'once-off', and fail to recognize that options are negotiable items.

The advice, therefore, is to never be blinded by options. People must exert effort to understand them, and determine if they are enough to make up for whatever weaknesses the company may have in their compensation package.

Pieces of Advice on Stock Option Negotiations

According to Michael Chaffers' article entitled "Negotiating Stock Option Packages", there are six things to do in order to get a fair deal when negotiating for stock options. These are, in my own paraphrasing:

1) approach stock negotiations the same way you approach other negotiations, i.e., focus on your interests and accept only offers that are reasonable and appropriate in relation to what others with your skills level make in the market;

2) know your industry's compensation packages beforehand from as many contacts and sources as possible who know your industry;

3) know the value of the stock options you are being given, considering the fact that the value of your stock options depend on a lot of factors, e.g., the grant price, when it will vest, the company's profile, how close it is to going public, its investors, its technology, etc.;

4) ask someone to help you quantify if the salary you are foregoing is worth the options you are receiving;

5) ask yourself if it is still worth taking the job if the options will turn out to be worthless, i.e., will you gain valuable experience? will the cash and other benefits still make the offer acceptable?; and

6) if you are not satisfied with the options being offered, try to bridge the gap creatively by asking for additional options that are tied in to factors that are valuable to the company, e.g., option grants based on performance, tenure, title, etc.

And here are more advices from other experts:

7) consider whether the company is pre-IPO or already public, because stock options from pre-IPO companies are usually at a healthy discount, provided that the company makes it to the IPO;

8) ask tough questions on things like: how many shares the company plans to sell, keeping in mind that shares are likely to be worth more if the company is not planning to sell too many shares; and what happens if you are laid off;

9) don't be there just for the money - you must like the job being offered to you and the challenges that go with it; and

10) be prepared to justify that you're worth every stock option that you're negotiating for.

To a lot of us in developing countries, the receipt of stock options from our companies is considered a ticket to potential wealth that can't be found anywhere else, bringing promise of a good life for our family in the future. We just have to keep in mind that all good things in this modern world, stock options included, come with complexities that need to be understood and overcome before we can use them to our advantage. There is no better way to accomplish this than to be well-informed of, well, our options.

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