Bottom line ... it's unlikely you're going to get rich.

Sure, all those people who got to be millionaires by working at Microsoft did it.  Closer to home, so did the folks who landed early at VerticalNet.  But most prospective dot.coms aren't panning out these days.  Even those that do go public tend to experience a "market correction" (remember last spring?) and the immediate return doesn't always amount to initial estimates.

U.S. News and World Report cited a statistic from VentureOne (San Francisco-based venture capital research firm) showing that fewer than 25% of all startups actually made it to an initial public offering.  Want some more sobering news?  One of every eight IPOs tanks on the first day of trading and the stock price of a majority of initially successful firms drifts down after the first six months on the open market. 

Sure, you can take the long view, but if you're thinking of trading salary dollars now for ownership later, it might be time to think again. 

What Are Your Options Options?

Until I started to look more closely at this subject, I wasn't really aware of the differences between types of stock options.  I just figured that you have to wait awhile. Until you get to the first level of vesting.  Until the IPO hits.  Until the lockup period expires. And until the market price makes sense for you to exercise the options.  Then you buy at the strike price, sell at the market price and sit back to count the profits.

Not quite.  There's a little more to it ... some having to do with the impact on your tax status.  It's important to know whether you've got nonqualified or incentive stock options.  The nonqualified kind is the most commonly awarded, but depending upon the financial strategy of your employer, you might be holding incentive options.  What this means is that you should probably consult your tax/financial advisor before exercising any options you may hold. 

As a matter of fact, it's probably a good idea to consult your financial advisor about what your option agreement actually means to you.  When you're granted stock options, you should receive an option agreement that sets out the particular terms of your award.  Typically, options are distributed under an employer-wide plan which explains rules that govern all options, and you should be given a copy of that plan as well.

It's not enough to skim the option agreement for the size of your grant and the strike price and then put it away somewhere.  You'll need to identify the following:

• What's the first date you can exercise any/all of your options?  Is there a staged plan?
• How do you go about exercising your options?  Do you have to lay out any of your own cash or can you buy on your own recognizance and then sell immediately and pocket the difference?
• What's the duration of the option period?  When do the options terminate?
• Are there any restrictions on exercising the options?  Termination of employment?  Death? Right of first refusal on stock purchase by the company itself if you decide to sell?

All of these affect the value of your options to you down the road.

Option Values at Public Companies, Startups and IPOs

Let's start with the easy one.  If you are joining a public company, any stock options you may be granted are easily valued.  Subtract the strike price from current stock value and ... voila - the value of the options to you.  This is simple math, but you still have to factor in your vesting time and how long until the options expire. 

This kind of option grant is real and the benefits are tangible.  Barring any gross downturn in the market (cross your fingers), you'll get a pretty reasonable idea of what this piece of compensation is worth.  As a general rule, stock options for public companies are awarded to employees with seniority and/or significant value to the company.  They represent a measure of your worth and recognize your contribution to the company's success.  Best of all, these options are generally awarded independently of your cash compensation.

Startups are another story.  These are the wannabe companies, ranging from two guys with an idea working out of their buddy's basement to professionally managed enterprises with substantial venture capital funding - and every possible permutation in between.  Their one commonality is that they need talent to get where they are going.  And that's where stock options come in.

From the short-term perspective of the startup, options are:

• Less expensive than market salaries
• Less expensive than employee benefits
• Less expensive than signing bonuses.

Let's assume that the prospects aren't this dicey.  Your startup has moved along - gotten a few rounds of venture capital. The dream is looking more possible.  What about your options here?  A better bet, but still not a given.  That IPO date can be slippery - as you move up on it, it can slide away because the market isn't favorable, or the analysts are a little schizzy about your sector's profitability.  It's still questionable, isn't it?

What to do, What to do...

I don't know.  It's up to you, right?  Only you can decide what's most important.  It depends on your risk tolerance, your life stage, your responsibilities.  The question to ask yourself is, and be very honest about the answer here, what's it worth to you? 

Once you've figured it out, it's time to take a good hard look at your company.  From the perspective of strategic position and business valuation.  You should evaluate your company as you would a potential investment - since that is the effect of accepting options.  Think of it as your personal due diligence.  Here's a start:

• What is the company's product/service?  How much demand does it generate from potential customers?
• What's the company's business model (how does it intend to become profitable)?
• Who are the company's competitors?  Are any of them publicly valued?  How are they doing?
• What's the status of the company's funding?  Where is capital coming from?  How fast is the company spending through it?  When does the company expect to become profitable; has this date been pushed back at all?
• How strong is the company's management team?  Are there experienced executives running the business?  Or is it just the founders? 
• Have all promises made to employees been kept?  On schedule? 
• How many hours are you working/will you have to work? (Hint, ask peers how many nights/weekends they stay over at the office.)

It may not be your preference to concentrate on the business aspects of your company, but once you've taken the options, it's your responsibility.  Ready or not, you're an owner now. 

More

Hey, I've got options too & like it or not, I'm also forced to follow my own advice.  I just think about them as something down the road that may, or may not, pay off.  I also keep my eyes open about career opportunities.  I know you're doing it too, since you're reading this and some of you are writing to me with your questions (jamie@jobcircle.com). Next month, Is There Really an IT Shortage?.

Enjoy this article?  Read more of JobCircle.com's Career Coach articles.

Jamie Fabian spent more than 15 years as a human resources executive before changing careers to become a senior project manager for a growing IT consulting company.  Now in management consulting for a large Pharma company, Jamie would like to be seen as a hybrid of Tom Peters, Tom Jackson, and Tom Wolfe, but spends too much time working, driving carpool and watching mindless TV to write more than this column.  You can contact Jamie with questions and comments at jamie@jobcircle.com.