How do stock options work when you leave the company


You are using an outdated browser. Please upgrade your browser to improve your experience. There are plenty of perks when it comes to working at a start-up hello, never having to put on a suit again!

But, while ping pong tables and video game breaks in the office may help you get through the day, owning a piece of a potentially multi-million or billion dollar start-up is how do stock options work when you leave the company one of the best.

To get you started, here are some key questions you should ask yourself and your potential employers to help you evaluate your offer. Attorney Mary Russell, Founder of Stock Option Counsel based in San Francisco, advises that anyone receiving equity compensation should evaluate the company and offer based on his or her own independent analysis. Ask the company founders or executives about valuation.

Next, consider that VCs often make 10 or more investments in different companies and hope for a big exit from one or two. In other words, they calculate the risk that most start-ups how do stock options work when you leave the company.

And, unfortunately, so should you. To put it simply, an exit event is when the company is either sold or taken public. And as part of your evaluation, you should ask the founders what their overarching exit strategy is. Do they plan to sell? Do they want to take the company public in five years?

Should your start-up exit at a great valuation, your equity could turn into cash. But should your start-up not make it—or should it stay afloat, but never sell or go public—your equity may not turn into anything. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own.

That means you and all your current and future colleagues will receive equity out of this pool. Both AngelList and Wealthfront offer an interactive tool where you can sort salary and how do stock options work when you leave the company compensation by position, skill level, and location. Ackwirean online database of anonymous start-up salaries and equity, allows you to sort a similar set of data also by company valuation and head count.

If you receive stock options—the most common form of employee equity compensation—you get the right to buy stocks at a predetermined price, or strike price. The company is legally bound to set your strike price at what is deemed fair market value of the company stock when the options are granted to you. As how do stock options work when you leave the company grows over time, the value of stock would rise.

Now, exercising your options on the same day of the grant is not common because you generally first have to vest. Restricted stock, on the other hand, is stock granted to you with restrictions vesting being one of the most common. You will be earning the full amount over a specific period of continued employment. The most common vesting schedule for employees is four-year vesting with a one-year cliff.

The idea is to avoid a hit-and-run situation, where an employee who turned out to be a bad fit gets to walk away with a piece of the company. For the same reason, founders and co-founders are also usually subject to a vesting restriction. After this point, the balance of your equity vests to you on either a monthly or quarterly basis.

The IRS considers both cash and equity compensation taxable income. There are special rules governing when and how equity compensation is taxed. Ask both the company and potentially a tax professional about the potential tax liability of your equity compensation to avoid tax-related pitfalls and any surprises. The most common form of stock options given to employees is incentive stock options, or ISOs. If certain limitations and specific holding requirements are met, ISOs can provide tax advantages when you exercise options and later when you sell the stock for profit.

So if you are granted ISOs, make sure to ask for an explanation of these tax advantages in detail. Once you have fully vested stock or have exercised your fully vested options, you have two options: You can hold your stock until there is an exit event or sell the stock in a private transaction to either outside investors or back to the company.

This may require company approval and may be subject to restrictions under federal law. Private sales in secondary markets are actually growing in popularity through services such as SecondMarket and SharesPost.

Some companies use these services to give employees an early chance to cash out before an exit event. For example, Sharepost serviced Facebook employees selling their equity to private investors before the company went public on May If you hold vested options and if you leave the company, you may be required to exercise all vested options within a specific period of time or forfeit them.

If you leave in good terms with the company, you may be able to negotiate a special privilege where the company lends you the strike price or immediately buys back a number of shares upon exercise to help you cover the cost of exercising. Maintaining a good network with current and former colleagues could help you stay in the know about what you can realistically expect when you leave the company.

But knowing as much as you can about your equity offer up front will help you determine its value and decide whether the risk of joining a start-up is worth the potential reward. Insisting on full legal docs at that point can be a distraction, but having some written memorial of your deal is helpful to avoid misunderstandings later on. How do stock options work when you leave the company Eun Jamie Lee helps self-starter women overcome the fear of asking in the workplace through hands-on group workshops.

She believes in learning by doing, listening before asking, and in growing the pie. Check out her upcoming workshopand subscribe to her newsletter. Hmmm, seems you've already signed up for this class. While you're here, you may as well check out all the amazing companies that are hiring like crazy right now.

Everything You Need to Know. Have a question about job search? Ask your question here Ask now. Is This the Right Company? Is There an Exit Strategy? What is the Percentage of My Ownership? How Long is My Vesting Schedule? More from this Author.