Quote: (04-25-2017 06:27 PM)The Beast1 Wrote:
As the title suggests, how do stock options in a start up work?
By "Start-Up" I assume you mean a Private Equity/Venture backed Start-Up, where the controlling equity is professionally managed capital (i.e. somebody else's investment capital). In these types of companies, it is typical for the investors to set aside 15-20% of the company's equity for an employee stock option program. The purpose of the ISO (Incentive Stock Option) program is to align the incentives of management and key employees with those of the business' owners. The owners' want to build as much value in the company as possible and sell it, either via an IPO or, more likely, to a strategic investor, within 5-7 years. The ISO plan is designed to give key employees a meaningful payout when the company sells, thereby motivating them to work there little asses off to make it happen.
The ISO plan is governed by a contract, many key terms of which you will have little or no leverage to negotiate, and which will, in every instance, put the financial investors' interests ahead of yours. Plans can vary widely. To assess the potential value of ISOs to you, you need to: 1) assess the growth potential of the company; 2) understand the company's realistic exit options and exit pricing; 3) understand the particulars of the ISO agreement; 4) know your equity partners and their philosophy and track record with respect to creating management wealth.
Start Reading here -
The Open Guide to Equity Compensation
And here -
Fred Wilson's A Beginner's Guide To Stock Options
Also, Fred's
A VC Blog is a good read for anyone new to the start-up business.
Quote: (04-25-2017 06:27 PM)The Beast1 Wrote:
How does vesting work?
There are two primary types of vesting - time and performance. Time vesting typically takes place over 3-7 years, with an equal portion of your shares vesting annually. ISO plans with performance vesting clauses require that you and/or the company reach certain performance milestones in order for vesting to take place. Often this requirement is in addition to the time vesting requirement.
Quote: (04-25-2017 06:27 PM)The Beast1 Wrote:
How about capital gain?
ASK YOUR TAX ACCOUNTANT.
That said, the last time I had an ISO plan, options did not qualify for the preferred capital gains rate. We used to exercise our options as they vested each year and purchase the underlying shares, thus availing ourselves of the preferred capital gains rate on any shares that we had held for over one year at the time of the sale of the company.
Quote: (04-25-2017 06:27 PM)The Beast1 Wrote:
I ask because I might be signing onto a viable start up soon and this was mentioned as part of the compensation.
The devil is in the details. Most often these do not pay out, as the company fails to sell for a sufficient price, ISO holders get screwed by lock-up or other clauses, or get paid out in the (sometimes shitty) stock of the acquiring company. It is important to look at the experience, track record and quality of the Founder and the Private Equity sponsors. If they have fucked over employees before, they will do it again, and vice versa.