Startup Negotiation: Know the Game

Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel.

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.

Startup Stock: Particles and Waves. Casinos and Creativity.

Photo: Bobby Mikul

Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel.

What is a corporation? Finance pros and justice types present two very different answers to that question.

On the finance side, a corporation is a casino-style financial arrangement between those who own stock. It divides up the rights to a financial return on capital. It emphasizes balance sheets and stock prices and risk and return to support the view that each corporation is a table in a casino that investors approach to place their investment bets and seek a financial return.

On the human advocacy side, a corporation is a living body made up of creative individuals. The liveliness of the group – defined to include investors, managers, employees, and, perhaps, the community or the earth – is the purpose of the corporation. They make comparisons to slavery, define externalities and articulate their values to support their view that a corporation is a living body that could not be owned.

Like a ray of light, which is at once a wave and a group of particles, the corporation is both a casino game for investors and a living, creative body. Evidence will always appear on both sides of this truth.

In choosing a career path and negotiating compensation, we use both perspectives. We find a place that has some life to it, to which our creative contribution can add life. But we tune into the casino view as well and seek compensation for the risk we take in joining the enterprise. This requires the eye of an investor who would look at the risks of the bet and the size of the possible return from every angle with the help of professionals in law, finance, technology, etc.

It would be distasteful to take this view of our work every day, but it must be done at some time. And it is best done with Stock Option Counsel. This blog will introduce the Stock Option Counsel perspective on the risk / investment that employees take / make in accepting stock options or other equity as compensation. It should be helpful to those evaluating their compensation and also reveal the points in time in which Stock Option Counsel can add value in this process.

Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel. You are welcome to contact her at info@stockoptioncounsel or at (650) 326-3412.

Who is Mark Zuckerberg's Daddy?

Who is Mark Zuckerberg’s daddy? In a traditional public company, the CEO’s daddy is the board of directors who hire him, and the board’s daddy is the stockholder who can vote out the board. But Mr. Zuckerberg has voting control over the board and the power to define his own priorities.

So, who IS Mr. Zuckerberg’s daddy? He answered that question in yesterday’s interview with TechCrunch founder Mike Arrington with a subtle message to employees: The employee equity we grant you today, at today’s low prices/strike price with a four-year vesting schedule, will “pop” at the end of the vesting schedule.

Well, he didn’t say that exactly. But he led with that very clear (and obviously carefully crafted) message to employees by defining a remarkably specific timeline for stock price increase (remember, he always references vague future goals such as “build value over the long term” and “making the world more open and connected”):

“Over the next three to five years, I think the biggest question that is on everyone’s minds that will determine at least our performance over that period, is really going to be how well we do with mobile. … I think it’s easy for a lot of folks, without us being out there talking about the stuff we’re doing, to really underestimate how fundamentally good mobile is for us.”

Did someone ask him about the next three to five years? Not the interviewer. Not the public markets. Who cares about three to five years? Employees care about three to five years because they will receive grants of options or RSUs that will become fully vested in three to five years.

So Mr. Zuckerberg’s message to employees is this:

1. I know you care about the Facebook stock price in three to five years, because its delta over that time is your chance to build a fortune in compensation. If you’re not expecting a delta, you’ll place your bets (work) elsewhere.

2. I am thinking about the stock price in three to five years, because that is what you care about. I care about you. I have a plan, and it is going to benefit you directly.

3. The plan is mobile. Facebook is going to have a higher stock price in three to five years because of mobile.

4. Your employee equity is not worthless. It is going to gain value in the exact time frame in which you want it to gain value. And you will be rich.

So, Mr. Zuckerberg has declared what employees are betting on if they bet their workdays on Facebook employee equity. Will the best and brightest take the bet?