Don’t think you’re going to be rich if a company offers you a hefty stock-option package. The odds of actually cashing them in are not as staggering as winning the lottery, but they’re equally forbidding.
Despite all the hoopla about companies—especially dot coms—dangling enticing stock-option packages in front of candidates’ noses, in many cases you’ll never get the chance to cash them in because most pre-IPO companies never go public.
And, although some companies have a mechanism that allows employees of private companies to redeem stock options before they go public, according to David Root, president of Pittsburgh-based financial planning company D.B. Root & Co., Inc., they’re the exception, not the rule.
Root estimates one in 10,000 companies go IPO. If they do go public, 85 percent of all IPOs trade below their IPO price within 12 months.
Cashable stock options were even attacked recently by the United States Department of Labor (DOL) when an opinion letter from its Wage and Hour Division advised that these options should be included in the regular pay scale. In plain English, it suggested employers calculate time-and-a half overtime pay of their hourly employees not only on salaries but also on profits made from exercising stock options.
Naturally, employees will be delighted because it means fatter paychecks if the stock options are worth a lot of money. Employers’ eyes, however, cross at the mere mention of the DOL’s opinion.
“Since options are typically granted to employees after one year of employment, it would require employers to recompute overtime compensation for each week of the year in which employees exceeded 40 hours and pay overtime compensation based on the higher regular pay rate,” explains Tom Burke, an employment lawyer at Los Angeles-based law firm Brobeck Phleger & Harrison, LLC. That requirement translates into an administrative nightmare, one that is reason enough for employers to stop issuing stock options, says Burke.
Root and other financial experts advise evaluating stock-option packages carefully. Start by researching the company. The package’s ultimate worth depends upon the strength of the company issuing the stock.
If it’s a public company, Root advises looking at the company’s 10K financial report. If it’s a private company, ask to see the company’s business plan.
It takes some chutzpah, but Root says if a company’s financials are in order, it ought to be proud to show it to you. After the market recently nose-dived an unprecedented 617 points with tech stocks especially being pounded to smithereens, I strongly advise getting your hands on as much financial information about a prospective company as you can.
Then, know your worth on the open market.
“Do not sell yourself short,” Root advises. Many companies will offer a pile of stock options to avoid paying a decent salary.”
Your goal is to negotiate a salary that allows you to live comfortably. Unfortunately, there are no rules in these kinds of negotiations. You must find your own way.
What should the percentage of stock options to salary be? “It depends largely upon your tolerance for risk,” Root said.
If you have a unique skill, you stand a good chance of negotiating a compensation package to your advantage. If you are a little leery about the company’s IPO potential, Root suggests you try for 90 percent salary, 10 percent options.
If an IPO is in the works, find out the name of the underwriter. The company underwriting the deal tells you a lot about a potential employer.
“If it’s a well-known underwriter like Goldman Sachs or Credit Suisse First Boston, for example, your chances of actually seeing returns on your stock options are a lot better than a company that doesn’t have the clout to attract well-healed investors,” Root said.
If your prospective employer is offering a big compensation package including salary and options, consider having an expert, such as a financial planner or accountant, negotiate on your behalf.
Root’s best advice is not to get sucked into what he calls the “greed factor.”
“Don’t let fear of missing out on what appears to be an opportunity of a lifetime dictate your decision,” he said. “Don’t lose sight of the bigger reality, which is that you’re investing your most precious asset—yourself. Job happiness and satisfaction are ultimately more important than a big stock option and salary package.”
Have you recently negotiated a job that included stock options as part of your compensation? Are you concerned that you’ll never get to cash them in? Should prospective employees be wary of a deal that includes stock options? Tell us what you think by sending us an e-mail or posting a comment below.