Salary or Stock Options for Employee at Startup
When you sign-up for a startup, perhaps the company will provide you with a stock options for a distinct timeframe. As you advance on the ladder, you are probably thinking if it is still wise to accumulate more options or is it better to opt for a salary increase. When you are juggling your options, understand that there are things that you should consider first, Is the company well funded in and does the managment have the potential to turn a product into a Company
Apart from understanding the EPOS which will be discussed in the next paragraph does the company have a Product/Service that will Hit the Market and scale wth little funding ? becasue when founders are faced with the challenge of always looking for funds then the thrill of building something worht while gradually erodes.
An employee stock ownership plan
is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer. ESOPs are “qualified” in the sense that the ESOP’s sponsoring company, the selling shareholder and participants receive various tax benefits. Since we understand ESOP, now what are the Factors to Consider When Choosing between Salary and Stock Options?
In case you joined a start-up company who belongs in a mature industry but will experience slow growth, it is probably better for you to opt for equity (considering that the company will not take the exit). In most of the industry, the entrepreneur will be more concerned in generating money as a profit rather than taking the exit and selling the business. A distinct company that generates 1 million annually in profit can be translated to 20 million earning, which is 5% of interest annually.
In the event that you are with a company who is supported by a venture Capitalist (VC backed), there is a possibility that the investor may sell the company so you should thread carefully when choosing stock options. For instance, if the VC will be under a new management and the valuation immediately slips down-the executives will be getting the new equity and you options will be diluted.
Let us take Digg for example, it is a successful company and will be selling their company for $150,000,000. Currently, you have at least 2% of those shares, and you are probably thinking that you made a good decision. When the new owner decided to fire most of the executives, they will probably cram-down the holders of stock options next. The share of the VC will increase; the share of the management will be retained while all the other equities will be wiped off the slate.
If you are with a capital-intensive startup market, always reason clearly, and consider worst case scenarios, is the company well funded to scale recession or a situation where the market crashes can leave your stock worthless. On the off chance that there is a liquidation process on the investor’s money, the management will likely sell the equity at a larger and lower price. This may appear good for the management, but it is bad news for the common shareholders and the employees.
Unless you will be an executive, you will not be protected by accelerated vesting. Executive will always be in a better position when protecting their stock options. They also receive a more favourable treatment on tax compared to regular employee. If you want to look at the best possible case scenario, then you will be probably getting 2% of the company that will sell for $50 million (average company only sells below $30 million).
Obviously, those people who are thinking about getting rich by taking decent-paying work at a startup company will experience a long line of disappointments.