I'm curious what portion of stock options ever become valuable; I'm guessing it's roughly the same as how many companies either reach an IPO or are purchased by another company (minus a little for too-high strike prices or shenanigans by the purchasing company), which seems like slightly better odds than buying a lottery ticket. That's probably the best way, as an employee, to think about them. They're worthless until they aren't, just like a lottery ticket, except that your efforts *may contribute to the chances of winning. And that's a huge asterisk, as many (or most) of the factors that go into the chances of winning are beyond the control of a typical employee, or even a c-level exec.
Good question and great points. 9 out of every 10 startups fail, so there is a good chance your options won't have value. I don't know the exact percentages, but your odds of making money are certainly better than playing the lottery :-). In addition to company performance, a lot of your success is dependent on how discounted your original strike price might have been relatively to the preferred price of the last round (I'll talk about this a bunch in the next episode). I think a healthy mindset for someone joining a company is to treat a new grant like a bonus that may or may not happen based purely on company performance. However, over time you should carefully track the performance of the company and the potential value of your options instead of continuing to assume the are worth zero. If the value of your options are clearly accelerating, you need to be aware of the financial implications around timing of exercise and other tax related matters.
Great video, thanks Chris! I'd love to hear your thoughts on typical percentages of options to expect as an early stage employee (foundation and engineer #1 of a bootstrapped SAAS company in my case). I know it'll have a lot to do with specifics of skills, wages and company size, but it's so hard to find this information so a general discussion would be much appreciated if possible 🙂
A really good question and a common one too. I'll talk about this a bunch in the next episode, but I wouldn't overly focus on percentage as the driving consideration. I know this is a big leap of faith and most people will ignore this advice, but your % ownership isn't as relevant as the number of shares granted AND the price point you're receiving your grant. If a company is really early, you should be able to get grants at a very low price and potentially a huge discount to the price an investor or buyer might pay in the near future. Think about how the multiple on your strike price might increase with success and then multiply that increase by the number of shares and decide if that upside is exciting to you. Your percent ownership will decrease overtime as the company raises money so don't get too stuck on that in the beginning. All that said, the industry average is probably between 1%-5% ownership based upon the scenario you described. That's obviously a big range but there are a lot of factors depending mostly on the mindset of the founders and how they are thinking about future growth and future capital needs. The closer they consider you to being one of the members of the founding team, the higher the % typically.
I'm a big believer in giving options to all employees! If your whole team operates with a sense of ownership, you're odds of success increase dramatically
Good question. I haven't paid too much attention to it yet although I worry about outstanding loans when employees don't have a definitive timeline or way of paying them back. I've seen too many people build financial plans around a liquidity event that never happens. I think a better option is to consider selling some shares to a secondary buyer in order to be able to fund exercising the rest. That way folks are at least exercising with money that they actually have in the bank.
@@VentureKills Ya I agree, I don't see myself taking loans and would rather exercise with cash and hodl, secondary liquidity is kinda hard but im excited to see what CartaX/EquityZen/SharePost do whether these catch on or stay niche.
@@EricCRO Yes, it will be interesting to watch. There has been the promise of a large-scale secondary market for a long time. One thing to remember is that existing investors often have a right-of-first-refusal to buy any common stock that people want to sell. This can discourage secondary buyers from negotiating if they feel they are wasting a bunch of time setting the price for insiders to buy.
Great, now I'm ready to take on wall street with my life savings, WSB here I come! JK, great video. Thanks for taking the time to share some knowledge with us.
Hey Chris, just wondering - you said that in reality one might not actually have to write the $10,000 check, and the lawyers would compute and eventually $90k just shows up. But later you say that if you don't have $100k then you won't be able to exercise your options...so just wanted clarity on whether one needs the cold hard cash to actually exercise one's options or not.
Please ask questions or leave comments! Also, I know I spelled "simultaneously" wrong. I was too lazy to re-upload the video once I noticed.
Honestly, the best video overall on TH-cam describing stock options. We’ll done!
Welcome back! Great summary of how stock options work and the various types of grants and tax implications. Thank you!
More to come!
I'm curious what portion of stock options ever become valuable; I'm guessing it's roughly the same as how many companies either reach an IPO or are purchased by another company (minus a little for too-high strike prices or shenanigans by the purchasing company), which seems like slightly better odds than buying a lottery ticket. That's probably the best way, as an employee, to think about them. They're worthless until they aren't, just like a lottery ticket, except that your efforts *may contribute to the chances of winning. And that's a huge asterisk, as many (or most) of the factors that go into the chances of winning are beyond the control of a typical employee, or even a c-level exec.
Good question and great points. 9 out of every 10 startups fail, so there is a good chance your options won't have value. I don't know the exact percentages, but your odds of making money are certainly better than playing the lottery :-). In addition to company performance, a lot of your success is dependent on how discounted your original strike price might have been relatively to the preferred price of the last round (I'll talk about this a bunch in the next episode). I think a healthy mindset for someone joining a company is to treat a new grant like a bonus that may or may not happen based purely on company performance. However, over time you should carefully track the performance of the company and the potential value of your options instead of continuing to assume the are worth zero. If the value of your options are clearly accelerating, you need to be aware of the financial implications around timing of exercise and other tax related matters.
Great video, thanks Chris!
I'd love to hear your thoughts on typical percentages of options to expect as an early stage employee (foundation and engineer #1 of a bootstrapped SAAS company in my case). I know it'll have a lot to do with specifics of skills, wages and company size, but it's so hard to find this information so a general discussion would be much appreciated if possible 🙂
A really good question and a common one too. I'll talk about this a bunch in the next episode, but I wouldn't overly focus on percentage as the driving consideration. I know this is a big leap of faith and most people will ignore this advice, but your % ownership isn't as relevant as the number of shares granted AND the price point you're receiving your grant. If a company is really early, you should be able to get grants at a very low price and potentially a huge discount to the price an investor or buyer might pay in the near future. Think about how the multiple on your strike price might increase with success and then multiply that increase by the number of shares and decide if that upside is exciting to you. Your percent ownership will decrease overtime as the company raises money so don't get too stuck on that in the beginning. All that said, the industry average is probably between 1%-5% ownership based upon the scenario you described. That's obviously a big range but there are a lot of factors depending mostly on the mindset of the founders and how they are thinking about future growth and future capital needs. The closer they consider you to being one of the members of the founding team, the higher the % typically.
@@VentureKills great information, looking forward to it and thanks again!
This was so easy to understand! Thank you. Can you explain RSUs?
New camera looks great! Welcome back
Thanks!
Chris, great episode. What's your feeling on giving stock options to every team member vs. limiting it to a more select group?
I'm a big believer in giving options to all employees! If your whole team operates with a sense of ownership, you're odds of success increase dramatically
Hey, what are your thoughts on some new loan startups giving loans to give cash to exercise options? great video btw
Good question. I haven't paid too much attention to it yet although I worry about outstanding loans when employees don't have a definitive timeline or way of paying them back. I've seen too many people build financial plans around a liquidity event that never happens. I think a better option is to consider selling some shares to a secondary buyer in order to be able to fund exercising the rest. That way folks are at least exercising with money that they actually have in the bank.
@@VentureKills Ya I agree, I don't see myself taking loans and would rather exercise with cash and hodl, secondary liquidity is kinda hard but im excited to see what CartaX/EquityZen/SharePost do whether these catch on or stay niche.
@@EricCRO Yes, it will be interesting to watch. There has been the promise of a large-scale secondary market for a long time. One thing to remember is that existing investors often have a right-of-first-refusal to buy any common stock that people want to sell. This can discourage secondary buyers from negotiating if they feel they are wasting a bunch of time setting the price for insiders to buy.
Great, now I'm ready to take on wall street with my life savings, WSB here I come! JK, great video. Thanks for taking the time to share some knowledge with us.
Hey Chris, just wondering - you said that in reality one might not actually have to write the $10,000 check, and the lawyers would compute and eventually $90k just shows up. But later you say that if you don't have $100k then you won't be able to exercise your options...so just wanted clarity on whether one needs the cold hard cash to actually exercise one's options or not.
Great videos. Super informative
ESOP cant stop wont stop ;)
you can't sell the options instead of excerising them?