There are two types of companies. One type sees equity as something an entrepreneur earns for making valuable contributions while employed. The other type wants to lure an employee to work day and night, but then hopes that you never actually get your hands on your equity.
If you want to win at the entrepreneurial game, it’s important to ferret out which kind of company you are about to join
Its difficult to tell how supportive a company is about employee equity. However, in my experience, here are the three questions that a prospective employee should ask that can shed some light on a company’s true attitude toward their equity.
1. Ask the company to provide the number of shares outstanding. If your company will not provide you an estimated number of shares outstanding, then they don’t care about your equity. Without the shares outstanding, there is simply no way for you to understand if your options are worth a million dollars or a single dollar. If the company has a billion shares outstanding, your 100,000 shares aren’t worth squat. There is no reasonable justification for withholding this data. If the company resists providing an estimate, then call bullshit: the number of shares authorized is usually available information to the public. Anyone can order the certificate of incorporation from Delaware. If your prospective company won’t tell you, then you should know that there is a fundamental problem.
2. Ask whether the company has ever allowed employees to exercise their options past the 90-day window. Companies typically require employees to exercise their options within 90 days of their departure. Often, the cost of the option exercise and the resultant tax hit is cost prohibitive for the employee. One option (other than getting an option exercise loan from someone like us) is to ask the company to extend the exercise period so that the employee doesn’t have to come up with the money right away. The only negative result of this extension for the employee is that the options no longer qualify as Incentive Stock Options but rather are taxed as Non-Qualified Stock Options. An extension doesn’t really cost the company anything. Many companies routinely grant these extensions. It’s a good sign if they do.
3. Ask whether the company has a repurchase right. In 2011, there was quite a public debate when the press discovered that Skype had the right to repurchase departing employee stock at the grant price. Such a grant makes a company’s stock options effectively worthless because the company can simply buy shares back at the strike price after an employee has exercised the options, leaving the employee with nothing. Unfortunately, we are more of these repurchase rights in stock option agreements. Run screaming from any company that has any flavor of repurchase right. And read your option agreement carefully.
Finally, remember that the best a company will ever treat an employee is the day before they join. If the company gets squirrely when you ask these questions, go find another one.