Startup Negotiation: Know the Game

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Craps is the best game in a casino. The house odds are very low at around 0.6%. When you’re rolling and you’re hot you can make big money for everyone at the table. And when you’re cold it doesn’t take long for your turn to end and the dice to move to someone who might get hot!

The same is true for Silicon Valley. It is arguably the only place where employees can strike it rich. Employees become rollers here, making the enterprise happen and enjoying some of the upside of the business through employee equity.

But the odds in craps can be even worse than double zero roulette if you don’t choose the right bets. There are about 120 to choose from, and the people who win know the game and know the risks they’re taking with each bet.

This is a list of casino-style descriptions of a bet on stock options, RSUs or ESPPs. We’ll give each a more thorough look (and pay attention to the great casino king Uncle Sam’s take) in later posts. To keep it simple, these presume that the vesting time/terms have been met by the player.

Stock Options: Player wins cash if (1) player pays cash exercise price to company before/when leaving the company and before the expiration date of the option; (2) company gives permission for or requires player to sell shares (on secondary market, at IPO, at sale of company, etc.); and (3) player sells shares at a price greater than the exercise price. Player loses the exercise price cash if (2) and (3) are not met.

RSUs (“Restricted Stock Units”): Player wins cash when (1) company settles the RSUs in shares of common stock (aka company gives player common stock) and (2) player sells the shares.

ESPPs (“Employee Stock Purchase Plans”): Player wins cash if (1) player makes cash payroll contribution; (2) company converts player’s cash to shares on purchase date (# of shares = cash/conversion price); (3) player sells shares at a price greater than the conversion price. Player loses cash if player sells shares below the conversion price.

Of course, this post does not include the 1000 disclaimers that would be necessary to cover every possible Stock Option/RSU/ESPP plan or equity compensation bet. But it should be a good place to start for employees trying to know the game.

 

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.