A few years ago I was working a trade show in New Orleans and decided to visit the casino since I’d never been in one before.
I know how to play Blackjack so I stepped up to play at a $5 per hand table.
Within 30 seconds I had lost $20.
(Apparently I am not like everybody else who tells me when they go to the casino they, “break even or come out a little ahead”. Here’s a Beck classic that sums up my casino experience.)
I despise wasting money. So I left. That was my one and only casino visit.
Because I don’t like to lose money, you might think I am risk averse. However, that’s not the case.
I’ve had some of my best career opportunities with risky startups and emerging product groups.
I love working with startups. They offer:
- Fast-paced action
- Nimble decision making
- High-energy levels
- Opportunities to move up quickly and work your way into new roles
- Recognition for results (vs. tenure, politics, credentials, etc)
What startups often don’t offer includes:
- High salaries
- Good benefits like 401Ks with matches
- Career stability/longevity
- Well-defined processes
- Established career paths
To make up for lower salaries, benefits and career stability, many startups offer stock options.
Today I am going to talk about my experiences with stock options and how my views have changed over time.
When I first was offered stock options, I came home excitedly to tell my wife that we were going to be millionaires! I fantasized about buying a big house, a Mercedes, taking expensive vacations and never worrying about money again.
I was naive enough to actually believe this.
Now, 20 years older and hopefully a little wiser (or jaded?), I’ve learned a few lessons.
Don’t believe the hype (click for Public Enemy video)
The media makes celebrities of the CEOs who make 100s of millions from IPOs and acquisitions. Then they broadcast stories of the lucky early employees who became overnight millionaires at companies like Uber, Google and Apple.
I would love to make that kind of money and I bet you would too! (I’d retire immediately).
But the chances are slim that this will happen for most of us.
- The number of stock options you receive can be misleading. The number may sound like a lot (10,000 – 50,000 shares) but unless you are a founder or C level executive, your shares probably represent less than a % of a percent of all outstanding shares. VPs of Sales would be lucky to be granted 1-3%. Sales directors, managers and reps will more likely see .01% to .1%. Also, everytime your company gets more funding, shares can be diluted.
- Money lenders and Execs have liquidation preference. The VCs, equity firms and senior execs will get paid first in IPOs and acquisitions. Preferred Shares and Multipliers are common. This means that they get paid for their investment plus a multiplier before any employee gets any cash.
- $100 Million in annual revenues with a clear trend of continued growth is what I’ve seen as a prerequisite for most IPOs. The odds that your startup will grow to $100M are not in your favor.
- Unicorns are rare. Microsoft, Apple, Google, Uber, etc. are rare. There’s maybe one created every decade plus a few smaller success stories where the founding executive team gets rich.
I hate to be the bearer of bad news, but it gets worse. Companies pay PR companies & investment firms to hype up acquisitions and IPOs. This is to inflate the IPO or purchase price.
The investment firms drive up the price because they sell immediately. But employee shareholders are often required to hold onto their shares for a period of time before they can sell. By the the time that period has expired, employee shares could be worth a lot less.
It’s not all bad news
Despite everything I said above, stock options can pay off for employees. I personally know people who have made between $2,000 and $500,000 from them. (Most of the people I know made less than $10K.)
Here’s how it’s worked out for me:
Stock Options at a Startup. I worked for a growing startup during the dotcom boom. My compensation included salary, commissions, and stock options. As I rose through the ranks of the company, I was shocked to learn that I was earning 40% less than my peers in more established companies.
But, I had 1000s of stock options so I was certain I’d be a multimillionaire within a year or two. I was so convinced that when the opportunity arose, I took out a home equity loan to purchase $50K of additional options.
One year later the company went bankrupt.. My options were worth $0.
Net loss = $50K (plus receiving a lower comp package during my 4 year tenure.)
Stock Options at a Public Company. When I joined a public company, I received a few thousand options that vested over a 4 year period. Almost immediately the company stock dropped below my strike price. I ignored these options for several years until one day a coworker said to me, “I am selling my stock today because it just hit a 10-year high”. By that time I was fully vested so I did the same.
Net gain = $36K which was the equivalent of $9K per year worked.
Restricted Stock Units at a Public Company. These were just like the stock options above, except that my purchase price was $0! These are my favorite.
The only catch was that they too had a 4 year vesting schedule. As soon as my RSUs vested, I immediately sold them.
Net gain = $10K-15K per year
Stock Options at another startup. At another startup I was offered salary, commissions and stock options. Older (and hopefully wiser), I negotiated for the salary & commissions package I wanted. On paper, the stock options looked generous, but I considered them a lottery ticket. They could payout big if the company IPO’d or was acquired for a big price.
As it turned out, I was laid off without this happening.
Net gain = $0. I was quite happy I had not traded salary & commissions for options.
Wrapping it Up
My experience had led me to believe that stock options in a public company are a decent benefit. Publicly traded stock options, once vested, can be sold at almost any time. I equate these to an annual bonus. You likely won’t make enough to buy a new car with them, but you might get a down payment from them.
Stock options in a startup are more like a lottery ticket. You might win big – even the powerball has an occasional winner. You might win a small prize sometimes. But it is more likely these will be worthless.
That said, it can be fun to have options. And being an “owner”, even if just on paper, gives employees a different mindset, accountability and stake in the business. If offered, I’ll take them everytime.
I just wouldn’t give up real money, in terms of salary & commissions, for them.
PS. Liked this article? I write one every few weeks or so, covering lessons learned in solving sales problems. Don’t miss the next one:
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