Best of Blogs: How to Value and Negotiate Startup Stock Options

NOTE: Updated February 23, 2016.

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

We have suggested the following free resources to Stock Option Counsel clients to help them master this area and gain confidence in negotiating their stock options and other employee stock. We hope you find this list helpful and invite you to contact us to find out how Stock Option Counsel can help you evaluate and maximize your startup stock compensation. Contact>

1.  Leo Polovet's' Analyzing AngelList Job Postings, Part 1: Basic StatsPart 2: Salary and Equity Benchmarks

2. Venture Hacks' I have a job offer at a startup, am I getting a good deal?

3. Andy Payne's Startup Equity for Employees 

4. Mary Russell's Startup Equity Standards: A Guide for Employees

5. Wealthfront's Startup Salary and Equity Compensation Calculator (This is very general but people find it helpful.) And Wealthfront's The Right Way to Grant Equity to Your Employees.

6. Patrick McKenzie of Kalzumeus Software's Salary Negotiation: Make More Money, Be More Valued

7. Piaw Na's Negotiating Compensation, from An Engineer's Guide to Silicon Valley Startups

8. mystockoptions.com's How does a private company decide on the size of a stock grant? (You may have to create a login)  

9. Michelle Wetzler's How I Negotiated My Startup Compensation

10. Mary Russell's Video Negotiate the Right Startup Stock Option Offer, based on Mary Russell and Boris Epstein's Bull's Eye: Negotiate the Right Job Offer

11. Mary Russell's Joining An Early Stage Startup? Negotiate Your Salary and Equity with Stock Option Counsel Tips

12. Robby Grossman's Negotiating Your Startup Job Offer

13. John Greathouse's What The Heck Are My Startup Stock Options Worth?! Seven Questions You Should Ask Before Joining A Startup

14. David Weekly's  An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Negotiation Rhythms #2: Best Alternative to Negotiated Agreement

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

We know we want to push beyond our limits to capture as much value as possible in a negotiation. But how do we define those limits? It takes a five-word phrase to bring this concept into focus: Best Alternative to Negotiated Agreement (“BATNA”).

The BATNA for a car buyer might be the same car at a nearby dealership for $20,000. The BATNA for a home seller might be an offer from another party for $1 million. The BATNA for a child trading baseball cards might be to hold onto his favorite cards and enjoy looking at them rather than to trade them away.

 

BATNA Slide.jpg

Any agreement below (or, for a maximum limit, above) a BATNA would leave the negotiator worse off than in the absence of that particular agreement. Said another way, the negotiator would be better off with some other option – their BATNA – than accepting an agreement on those terms.

 

BATNAexamples.jpg

To properly identify a BATNA, we must do a lot of calculating, daydreaming, and going out in the world to test alternatives. But this creative process is necessary. When we believe that the only alternative is the one at hand, our negotiation position is dangerously weak. It is also dangerously ineffective because it leads to an arrangement that does not, in fact, make the negotiator better off than without it. And any deal that is not in both parties’ best interests is unstable and likely to collapse after it is made.

Countless factors go into naming and ranking one’s alternatives to arrive at a BATNA, and even then it is impossible to do so clearly as those factors cannot all be outlined in numerical format. A better offer might be less certain of being completed, so it might be more advantageous to make an agreement on less favorable terms today. For example, the other job offer might not be certain even though it appears it would be more advantageous if it were finalized. This is the old saying that a bird in the hand is better than two in the bush, and this can be dangerous for those who optimistically negotiate as if their imaginary alternatives are already in the hand. In the other extreme, this is very limiting for those who are very fearful of uncertainty, as they will accept disadvantageous terms for the simple purpose of having certain terms when a bit of risk in pursuit of a better alternative could have led to greater results.

Timing is important in other ways as well, as a negotiator with more time to come to an agreement will have more chances to find alternatives to the agreement at hand. "Wait and see" becomes a BATNA in itself. The opposite of this would be a party who must have resolution today, which would, of course, limit the alternatives.

Beyond hard limits on time, some people do not enjoy the back and forth process of negotiating. They might prefer to take this deal, and even to accept much less of the middle than is possible to capture, than to continue to seek alternatives or negotiate deals. For these people, the process itself inhibits the growth of BATNAs.

We’ll see in the next post – Negotiation Rhythms #3: Sales & Threats – how brainstorming or eliminating BATNAs changes the ZOPA and improves or weakens our force in negotiation.

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.