What are Share Options Worth?

jon_eaves submitted a thought provoking question on the worth of stock options. One only has to look at the recent IPOs of Red Hat ^[?] and VA Linux ^[?] to see why this might be desirable to someone in the market. Jon is looking for some discussion on the advantages, restrictions and risks involved in such dealings. Anyone out there with some good information or first hand experience into the things you need to watch for? Click below for the full submission.

"Hi all,

I'm in the process of looking for further employment, and one of the companies that I've been talking to is a start-up, and they have raised the option of taking shares instead of salary (or at least a portion of it).

I'm not super $$$$ focussed (or I'd be in SAP rather than Java), but to evaluate the offer against other companies, I'd be interested in hearing from other people who have taken share options, and what they have ended up being worth and what restrictions are "normal".

The sorts of things I'm interested in are;

1. How long did you have to keep them ?
2. What was the increase (or decrease) in value ?
3. Do you think it's a good idea ?
4. What are the "gotchas" ?

It's highly unlikely that I'll be making a choice based solely on $$$$, but it's important to understand the economics of it all.

Comments? "

I work at Ask Jeeves and the AMT sucks.

I have been here a year now. My initial grant was for 15000 shares at a little over $1.50 a share (adjusted for a pre IPO reverse split).

How do I have to keep them?

The important issue here is longterm capital gains. Taxes. They suck. When you first get hired, you will be given a piece of paper from the board that says how many shares you have and how much the strike price is (strike price: the amount you may purchase shares for). This paper is called you option grant. There is an important date on here (surprisingly enough, called the grant date) which is the date that you officially begin vesting. But this date also have important tax implications. You only get long term capital gains tax rates (20%) if you hold your stock (not the option) for two years after the grant date and one year after the excercise date (the day that you purchased stock from your options). These periods overlap. If you sell your stock either less than two years from your grant date or less than one year from your excercise date, then you have what is called a disqualifying disposition. Basically, the money you get from your stock sale will be treated like normal income.

What is the increase in value?

This is my fourth startup company. Although one of my previous companies went public (on the EASDAQ, though so obviously that doesn't count) and another one was bought out, I never saw a dime from them. However with Ask Jeeves (Nasdaq: ASKJ), I finally hit it. ASKJ closed on friday at 103, and if the stock held that value for me to fully vest, I would have made 15000*(103-1.50) or $1.5225M. However, since my vesting schedule spead over 4 years, presently, I only actually have $380,625 of that.

Our stock has been very volatile lately (mostly with the lockup coming -- I'll explain that later). We have been all the way up to $190. On our first day of tradingwe shot up to $70, then over a few months sank to $30. Then to $190, now back to $100. Our chart ( http://www2.marketwatch.com/intchart/default.asp?s ource=htx%2Fhttp2_mw&symb=askj&sid=15052 1&menus=&mnuTimeFrame=open&mnuCompareTo=closed&mnu Indicators=closed&mnuChartStyle=closed&t ime=8&freq=1&compidx=aaaaa%3A0&comp=&ma=0&maval=9& uf=0&lf=1&lf2=0&lf3=0&type=64&size=1&dra w.x=98&draw.y=17 ) looks like a rollercoaster.

Lockup Expiration is another thing. When a company goes public. All the pre-IPO shares cannot be traded (this mean employess, board members, investment banks, etc...). You have to wait, usually, 6 months to do anything with them. Our six month expiration was up in December. However employees still counldn't sell. There are also blackout periods where employees cannot sell. Blackout periods start before earnings are announced and continue until the SEC mandates 3 days after the earnins report is released (this is true of all nonpublic information -- you cannot trade on nonpublic information, and if you do know nonpublic information you must wait until 3 days after that information is made public).

The moral of the story is that you have to hold on to you stock until the SEC says that you can trade it.

Do I think that it is a good idea?

I like small companies. There are many on the IPO track. It is more coincidental than intentional that I work at places that give stock options. Many companies give a form of stock options (all of what I am saying here has to do with qualified stock options, most larger companies give nonqualified stock options, which are slightly different). I might, personally, find it better to get a larger salary with a job that I really liked than to get a heap of options and a job that I just don't despise.

What are the gotchas?

1. AMT. Remember those three latters. If your comapny is successful, you will hate those letters. In the US there are 2 Federal tax systems. The standard income tax that you are used to and then the Alternative Minimum Tax (AMT). AMT is much simplier to calculate. It is basically (close to but not exactly) your income tax, but no deductions. Then you take one huge deductions at the end of adding everything else up. That personal deduction is usually so big that you never have to pay AMT. You will have to calculate your AMT when you excercise your options (turn them into real stock). Your tax basis of your options in your strike price (tax basis: what is the base amount you use to calculate your tax costs). When you excercise the options, your tax basis will be raises to the current value of the stock (if I excercised today, my tax basis for my options would go from $1.50 to $103 and if I did this to 5000 shares, I would be liable to pay AMT on $507k). You have to pay AMT on this spread (spread: the difference of your strike price and the fair market value of the stock). The only good things that comse out of AMT is that when you sell your shares, you will calculate the taxes next time against your excercise price instead of your strike price. And the other good thing is that AMT is just a matter of time: ever year after paying AMT, is you do not pay AMT, you can get a deduction in the amount of the difference your AMT and your normal income tax. Basically, in the years you are not liable for AMT your taxes will be greatly reduced. So you really only loose the opportunity cost of the AMT amount (which can still be huge).

2. Don't watch the wiggles. Watching the stock price hurts. I have no doubt that ASKJ will rise in the future but seeing it tank like this is painful.

3. The value of the stock is in how valuable the company is. Make smart decisions on who you work for. No matter how much you may not like the idea of uppper management, make sure your upper management is good. No, not good, amazing. Make sure they understand how to keep a company happy and productive. They are many people out there that understand the technical apsects to company finance, but if the workers are not happy, the company will go nowhere.

Financial Engineering 101

Ahhh ... the eternal question of life, how much is an endeavour worth. Because that is the fundamental valuation behind a share (fraction of a business). Let's start withe the basics.

1. A commercial enterprise is a legal structure combining various resources (natural, human, financial) to produce a stream of profits through sale of goods (widgets), services (time/talent) or risks (more complex financial/information derivatives)
   
2. A company can be funded through debt (savings or historical under-consumption) or equity (claim to future profits capitalised through a public share market)
   
3. Think of the market as a massive parallel machine evaluating the likely returns (time-discounted future cashflow) from allocating capital
   
4. From this you can see that a share price is the equilibrium between willing/informed buyers and sellers in an open forum (assuming you are not momentum buying
   
5. Options are a way of adjusting the risks (volatility) and forms part of a repetoire for the market as price discovery and liquidity mechanisms
   
6. The sophisticated players have complex systems like derivatives [sciam.com] to work out the comparative advantages of various financial instruments such as bonds, equity indexes, etc based on economic indicators
   
7. Thus the share price is a measure of the assets (intellectual in the case of high-tech) and the stream of suckers ... err .... customers :-) willing to pay to access that embedded expertise
   
8. The option (from the point of the board of directors) is thus a proxy measure of the economic value added (due to the time delay of vesting) and is commonly used as an incentive scheme to reward employee behaviour that helps the company's mission (though it can be easily abused) and thus grow the enterprise's profitability
   
9. However, the market evalutes this compared with many other financial instruments, in particular the risk-free interest from government bonds and (assuming efficient market operation ... a big academic debate by itself) increases the capitalisation of companies that perform above average and conversely punishes (ie removes funds or reduces willingness to purchase) those that don't meet their (admittedly amoral) criteria of capital growth/formation
   
10. Now some tech companies (the proverbial 800 pound gorilla) use this pricing information as signals to decide when to purchase others in an effort to either thin out opposition (rationalisation), fill product lineups (synergies), or protect an existing customer base
    
11. Hence an IPO and resulting buzz can be viewed as a cheap way of advertising your capabilities to potential suitors as a trade sale and a way of pricing your product better than any patent office
    
12. The speculative market (ie NOT long-term investors) has picked up on this and is willing (for the moment) to give a take-over premium to likely blue-sky candidates in the expectation that a rich (but stupid) competitor is willing to fork over real cash to overcome any time disadvantage in the technology arms-race
    

The short of it is that options can be viewed along a spectrum ranging from a benign form of aligning employee interests with the owners (making money) through long-term organic growth, to a bribe to accelerate work effort (those 80 hour weeks) in order to ambush an unsuspecting target. Is it worth the pain/risk? In one sense, it comes back to the individual in evaluating what type of career and lifestyle they want, whether they are willing to sacrifice the present for the future. The monetary gains can be quite high from creating products/services that others think they want but ultimately it comes down to individual values (for example, a study indicated that people valued a happy marriage and family as being worth $150K/year). In pricing options, you have to be realistic in understanding your job and the business the company is in as to the long-term prospects. Remember that public shares are capitalised expectations and growth of future profits so unless you're in a sustainable business, things could get sticky when the growth slows (despite the wild expectations of some businesses, biologists call unlimited growth cancers).

Successful (note not necessarily equivalent to good or moral) businesses have a decent model (e.g. Microsoft = controlling a platform to flog their building blocks) and anyone relying on accounting tricks (like the pooling of interests to hide deprecation of goodwill) or using overinflated script as currency to eliminate competitors is in the brand-name stripping business and not IT (ie guess who gets made redundent when a merger is announced, the programmer or the manager?). If the company provides you with its financial record, then you can probably made a guess as to the future and likely profitability to see whether your efforts (and thus options) are fairly rewarded and whether you can trust the managers to achieve their role (creating a need for the product/service). One good trick is to ask yourself, if you are a bank manager, would you lend money for this business? Some basic financial literacy goes a long way to avoid being ripped off.

Best of luck in your wealth creation efforts.
LL

Re:my experience..

I have been with a company for 3 years.the way they work (at least here) is you have the "option" to buy x number of shares each six months at whatever the current price is.

This is not a stock option plan, it's an employee stock purchase plan (and not a very good one.) At the place I work, we have both. Out ESPP works pretty much how you describe it, except that we get to buy the stock at 85% of the lower market price at either the beginning or the end of the 6 month period. Another words, let's say the 6 month window begins on July 1st, at which time the stock is at $10. We have an elected amount of money deducted from our paycheck each pay period and this money gets put into an escrow account. On December 31st, the stock closes at $26 per share. Well, at that point, we get to buy the stock at $8.50, effectively making $17.50 per share profit if we turn around and sell it immediately. Conversely, if the stock took a dive, and closed on December 31st at only $5, then we'd get to buy it at $4.25, which is 85% of the lower price.

On the other hand, we also stock options, which were granted to us when we joined the company, and the price of these options is set based on the closing price the day the options were granted. From that point on, the option price remains the same, no matter what happens to the stock, thus if the company does well and the stock goes through the roof, you can make a killing, but if the company does poorly, then the options are worthless. There is also the issue of vesting in these options. Our vesting period is rather long (5 years) but it vests 4 times a year, so each quarter I become vested in 1/20 of my grant, so if I wanted to, I can exercise that portion.

If the company is doing well, this amounts to a shiny pair of golden handcuffs, because if your options are suddenly worth, say, $100,000 net profit, it's much harder to walk away from that, if you're not fully vested. A good way for company to keep people around.

Stock options at the major corporation.

A related topic of related interest is stock options at a major corporation. The major advantage is that the company is stable, and you're *almost* guaranteed that your options will be worth *something*. The downside is that you're not going to get a zillion shares (or a significant percentage), and you probably won't be seeing outrageous growth in the near term. Another disadvantage is that you may get very screwed during an acquision.

In our case, we were given a 1200 shares with a strike price of $26. A third of these vested each year. First year, their after-tax value was around $7,000 at the time of vesting. Second year, the next set of options had an after-tax value of $12,000. The market was not kind to the stock this year, and has effectively stalled at around $13k but fluctuates WILDLY. (No longer an INVESTMENT stock... the stock is now a TRADING stock.)

Be aware that taxes eat a significant chunk of the value, unless you hold for over a year. Cashing in during the first year will cost you around 43% of the amount in taxes.

I *did* make the mistake, discussed earlier, about confusing options as compensation instead of incentive. So did just about everyone else I know. I'm being paid $20k below an easily obtainable market value. But there is an advantage of having options instead of a salary... bulk payment. Having an extra $1k/month is great. But being hit by $12k at once is a WHOLE LOT BETTER. You can do something useful with all the money at once.

What are some useful things to do with your stock options?

If you have credit card debt, and you don't think your stock is going to gain at a rate equal to what you're paying on your credit card, PAY OFF THE CREDIT CARDS. You're paying out more than you're gaining, otherwise.

If you've got a stock that you think is going to go up like a rocket (or you are forced to excersize your options earlier than you want to), investigate a MARGIN LOAN. I have options with Solomon Smith Barney. I called the line I use to excersize my options. I hit the option for a real person. I asked to speak to a financial advisor. Basically, you are using the value of your options as a guarantee to buy more stocks with. (There are risks. Talk to an advisor and completely understand the transaction.) The other net plus is you get a real trading account.

Of course, there's always the obvious options of starting your own company, or just spending left and right on cool stuff. Can I recommend arcade games? Ones by Atari, perhaps?

The downside to all of this is that there is no guarantee. You are gambling that the value will go up. (Actually, at one point, people who would have excercised their options would have had to PAY money!) The other is that you'll still be working for the company. Also, you're gambling that there isn't a significant change at the company.

What kind of significant change? Well, EDS is taking over our IT shop at the end of the month. We have to excersize our options before February, or we lose them. And, we're getting SCREWED out of our future unvested options (easily worth post-tax $40k, and certainly more in the future). They've put in writing the effective language of "you WILL join EDS and lose your options or you are fired and lose your options and don't get any severance benefits". My (pre-EDS) employeer is going to get what they're asking for... a nice class action suit slapped on them.

EDS actually wants to keep a good chunk of us and they realize we're getting screwed. (IE: "If I don't get my stock options, you don't get me!") They claim to be working a (nebulous) "performance share" deal. The question now is if it'll be worth $500/year, or $50,000/year.

Sometimes, I wish I didn't have to worry about options. They really add a lot of stress and unhappiness to what should be something pretty simple. But then, if it weren't for options, we wouldn't be paid well.

Back to the original topic, take the job with options or a higher paying one without? It is just like investing. Determine your tolerance for risk, and go from there. If you take the options, then take the time to understand the stock and the way it behaves. What sort of things it reacts to, and what other stocks it reacts with. See if it is a trading stock (goes up and down in a range) or an investing stock (nice upward and somewhat consistant line). Options in a trading stock are almost worth nothing.

Good luck!

Please visit these resources...

I strongly advise anyone even considering getting even remotely involved with options, to visit the Chicago Board Options Exchange's basic education page [cboe.com]. The Philadelphia Stock Exchange also has the Characteristics and Risks of Standardized Options [phlx.com] available on its site. Most people simply don't understand what they are getting into with options. Although options on equity securities can potentially lead to tremendous payouts, particularly at the height of the largest bull market in history, they can much more easily turn out to be completely worthless. If you don't take the time to understand the inherent risks of options trading, you deserve to get burned at some point in the future.

Re:Do what you like best.

Do what you WANT to do.

Yes. Yes, yes, YES!!! To my way of thinking, having a job that I enjoy going to every day is (ok, almost) as good as being independently wealthy and doing what I want. Sure, it's cliché, but there's a profound truth in that old saw that money can't buy you happiness.

If you want to be a developer, go write code. If you want to make a fortune, persue your career with that goal in mind. Either way, I would be very careful of getting caught up in the IPO lotto. As others have observed, there's lots of risks:

• A company that hasn't gone public might never; their options might never be worth anything...
• Even if the company does go public, the stock market is a notoriously unpredictable beast; there's no telling what your shares might end up worth
• Even if the company goes public and your options are worth a lot of money, you will have to work through a long vesting period before you really own them. And 5 years can be a long time to hate your job.

There's got to be lots of companies out there saying "thars gold in them thar internet IPOs", and most of them have got to be more cluefull than LinuxOne. Do you really want to spend a long period of time working for a company with the primary goals of 1) Going through a successful IPO, 2) Making sure the stock price stays as high as possible, and 3) Very little else?

Options: Incentive, not Compensation

they have raised the option of taking shares instead of salary (or at least a portion of it).

I don't recommend this. I did it in my first startup and ended up a bit out in the cold - especially when the company failed. I do have about 40K shares worth of wallpaper though.

In the second job in which shares were offered, I negotiated a good salary with a decent amount of shares on top of that. I think of options as being worth $0 - they are not compensation for anything, they are incentive for me to stay through the vesting period.

I'm now in my third startup with options and I took the same approach this time - options are just icing on the cake if we build a successful business.

I know most people in this industry are more interested in the work than the money, but you have to be smart about the money too.

1.How long did you have to keep them ?

In all of my situations it's been a four year vesting period. The vesting increments over the course of those four years. It's not uncommon that they would vest 1/48th per month over that period. Sometimes you'll find a "one year cliff" in which nothing vests for the first year but at one year you magically vest 1/4 of your options and then 1/48th of the total options per month after that. I heard of one place that vested 1/4 per year rather than incrementally per month.

Also, be aware that if your company completes an IPO you will probably be subject to a lockout period of from 6 months to a year. The guys at VA Linux weren't able to get in on those high prices initially - they are still holding theirs.

It depends on your agreement, but there is often a clause stating that the options vest immediately in the case of the company being acquired.

2.What was the increase (or decrease) in value ?

First Time: $0
Second Time: ~$4 per share
Third Time: Still waiting on that one

3.Do you think it's a good idea ?

Of course, but I've been through about 4 companies in the last six years, so I don't know if I'd listen to me if I were you.

4.What are the "gotchas" ?

Taxes. Spend a lot of time at the Motley Fool messages boards dealing with employer granted stock options and take a look at this www.fairmark.com [fairmark.com] site. There is a lot of information here.

There are different types of options, so be aware that different laws apply differently to them.

Stress. As a shareholder, you get to be stressed when the company is on the ropes. Of course, there's the flipside. However, have you looked at the success rate figures for startups?

Good luck.

Troy Denkinger

Do what you like best.

My first rule of employment: Do what you WANT to do. Meaning, don't take a job just for the "possibility" of a big payout due to stock options and a large IPO. Unless the company has already gone public, the options are worth nothing, and could be worth nothing in the future. This is why you have to view these things as a "bonus" only. If the happen to be worth something later, great, if not, no big deal. It shouldn't sway you into going somewhere, unless your decision is based on two companies that are exactly the same in every way, save stock options. Sometimes, options don't make sense either. An example:

You get an offer to work for a startup doing some "new" think with Linux. They're only going to offer you $40k, but they'll give you 10k in stock options, and tell you to look at the Red Hat IPO for an estimate of what those 10k options will be worth in 3 years (when you're fully vested and can sell them). Wow, you think, I could be worth over a million bucks in 3 years...of course your employer knows this and expects you to work 60-80 hrs/week to acheive this.

You get a second offer for $50k, but no stock options. Nice place, and you'd love to work there because you know it's laid back and isn't as cutthrought, only 40 hrs/week, but those stock options are on your mind.

So you take the first offer, lookin for the big payout. Your company goes public after 2 1/2 years (before you're vested), and doesn't do too hot, after 6 months (when you can sell) the stock is only at $4. Hmm...who got the better deal?

Deal 1: ($40k/yr * 3yrs) + (10k options * $4/share) = $160,000

Deal 2: $50k/yr * 3yrs = $150,000

Whoa, even at only $4 per share, you made the right choice! But wait, not really. Think of all the time you put in that you could have been doing other things with that other "lesser" offer in deal 2. You'd save yourself 20 hrs a week on average to spend w/ your family and friends. Also, you have to remember the time/value of money. $10k now is worth more than an extra $10k in 3 years if invested correctly.

Moral of the story? Do what's best for you, and don't base your decision on pipe dreams that could ruin your life.

Get the facts and apply common sense

The options will have value if your company goes public or is acquired by a public company. One of these things will happen if your company has a useful product and sufficient buzz. A useful product is not enough by itself; if it isn't known it won't matter. Competitors with better marketing will be better known and will get the bucks first.

So what you need to do is answer some questions the best you can:

• Is the product going to be useful to someone? A product that is interesting to you as an engineer might be of no interest to a potential customer (or web surfer).
• How is the company going to make money? Read the business plan. Does it make sense to you?
• When do the first suits show up? You do, unfortunately, need some of them for your company to succeed. There are exceptions, but this is rare. Personally, I have found it difficult to interview sales and marketing guys and figure out if they're any good. In hindsight, however, the bad ones broadcast warning signs. (E.g. a sales VP who came out early in the life of the company and said he had no idea who he would be selling to. But he said it in that confident and smooth sales VP way and yes, he snowed me.)

You should definitely talk to as many people as you can within the company to decide whether you think they're going to succeed. DO NOT interview with just the techies. Insist on meeting the suits and reading the business plan.

Other things to watch out for:

• Don't focus on the number of shares: it's the percentage of the company you own that will determine what you make on options. If your company is sold for $100,000,000 and you own 0.1% you get $100,000. It doesn't matter if you had 5 shares or 500,000 shares.
• Try to figure out if an IPO or an acquisition is most likely (And don't just listen to what the CEO says.) In case of an acquisition you can get burned badly by liquidation preferences. You have to keep an eye on this as the rounds of funding come in -- it gets renegotiated each time. I let my CEO know that I'd hit the road if we ever got burdensome liquidation preferences. This made a huge difference in the cash I took away from my last company, since we were acquired at a price where the preferences almost mattered. (Liquidation preferences are goodies that go to VCs if the company is acquired for less than a certain price. First they get back their original investment; then they get their fractional share of the remainder. Employees get shagged rotten.)
• Another thing to watch out for in case of acquisition: What is the acceleration schedule? If you joined this company today and they were acquired tomorrow, you would have vested in zero shares. Your options will still be worth something, but the payoff is still in the future. Sometimes there is acceleration by a certain number of months (18 is typical) which means your vesting schedule accelerates that much. In the scenario just described, with 18 month acceleration, you would immediately be able to cash in on 18 months worth of your options.

More to watch for...

I just went through a public offering last fall myself. I know from my situation a few things that might be useful:

Get the share price on paper. Get the company to justify that price.

Ask around what a standard grant is at the company in question. I was told when I joined the company I currently work for that when I joined (6 months before IPO) that my shares would most likely be around $8. After joining the company, those same shares (1000) were granted to me at a whopping $18.90 -- a much different than my expectations. Later, the company went public at $11/share. Effectively making my options worth nothing until the stock price climbed to above my grant price.

Know the math.

I know this sounds stupid, but work the price out on paper. A standard approach by employers is the Here is a $30,000 in stock options that could make you a millionaire. That same $30,000 might actually be signifigantly less under normal circumstances. A grant of $5/share * 1000 shares = $5000 that you have to put up front to get the stocks you are vested in. The company may believe that they can warrant a $30/share price (which is reasonable), hence the $30,000 estimate. The real world is a little more complicated: The real price in the above example is $30,000 - $5,000 = $25,000. Granted, in this example, that is a nice investment. If you only plan on staying with that company for two years (assuming 4 year vesting period) and will only get vested in 50% of those stocks.

Have realistic expectations. Red Hat and VA Linux are exceptions to the rule.

Although we have all been amazed (or maybe not very surprised) by the spectacular success recently of Red Hat and VA, these companies are most definately exceptions to the rule. While the tech industry was surprised when the IPO's of these companies were as successful as they were, the investment community was dumbfounded. Most companies IPO somewhere between $10-$20 a share and generally open around that price or slightly above before settling near the IPO price. That is because CFO's and investment bankers aren't dumb and will have a good feeling for what the company can support for a stock price.

There is no garentee with stock options.

As stated previously, it is a great gamble and can pay off immensely but it is not money in the bank. Keep your whits when examing a company based on possible stock options. One company offerred me 10,000 shares @ ~.30 share while another offerred me 1000 @ ~$18 and I took the $18 for several reasons. First, while the first company's offer was certainly better given just those figures, you have to look at the time frame involved. Company A wanted to go public eventually but it would not likely happen for at least 5 years. Company B was on the verge of an IPO (it happened 6 months later) and was much more of a sure thing. Five years versus 6 months was a great selling point. Also, be aware that most companies will never go public! Either they will go under or will never have the earnings or size to support itself in public trading.

Know your taxes and the tax laws of your state and federal goverment.

Be acutely aware of short term versus long term capitol gains. Consult a CPA if you are really unsure of the financial implications of stocks. Believe me, there are many. Short term capitol gains will impact the bottom dollar quite a bit. In the above example I gave, the above $25,000 ($30,000 in market price minus $5,000 to buy the options) you would actually receive around $15,000 (this will vary depending on your state) if you sold in the first year. That same $25,000 will be worth $20,000 if you wait more than one year after buying your vested options before selling them. Believe me, it gets worse. People make careers out of fiddling with these numbers.

I hope some of this helps. Be aware, I am a developer not a CPA or business person or upper management so take everything above and research your own answers and apply it to your situation.

Caveat Employee

I'd say that the first thing to be wary of are vesting rules. It is a sensible and ubiquitous precaution for a company to keep you there; you are the value of the company, more than its so-called assets.

But it is therefore easy to get stuck at a bad company. You don't know how much the company will be worth when/if it is successful. You need to know what proportion of total shares is represented by your share (I know one company which basically offered n shares, but said, "You'll just have to hope we don't issue too many shares and dilute you out of the game. Trust us."

You'll want to get a good idea of the management team, talk to other coders there, etc. You should do this anyway, but if salaray was all you got, you could just jump to somewhere better. Vesting rules means that much of your pay depends on you staying 2-4 years-- that could be half your working life due to age discrimination. That means saving 10% of your income for your retirement, too.

It is, philosophically, great that you don't care too much about money. But for Pete's sake don't tell them that. Otherwise they will lure you with 'intangibles' which will vanish by week two. I know people who are hideously underpaid for their skills, but get seduced by sweet talk from managers who are taking 10x the salary. Take 80k instead of 50k and donate it to charity-- you'll be doing a good deed and management will regard you as an $80k asset. This isn't about being a 'nice guy', it is about not being a naive businessman. To them, your worth is what they are paying for you.

Remember age discrimination. There'll be some great young 22 year old who can work 16 hour days and is up on everything new, and doesn't have a family to support in ten years. So count on a short working life before you have to settle somewhere where your bargaining position isn't so good.

Look at who is investing. Joe McClueless might be big in the machine tools field, but to him your venture is just a way to put a little risk in his portfolio. If Larry Ellison is dropping $10M, though, you know that your company has been judged as a good investment by experts. Don't look at who they're 'talking to'. Anyone can talk to anyone else. The measure of a company is ink on paper, and numbers not happy words.

Finally, and this actually should have come first, make sure this is something you believe in as a field. Don't do databases because they are hot. If your passion is UNIX, do that. If it is COBOL, do that (!). If it is graphics and usability, do that. You'll be happier and much more successful doing work you love and believe in. Just remember: you are also a businessman. Act naive, and management will fleece you. If you don't believe in money, take it anyway, then give it to charity.

Recent Infoworld article

Infoworld has an article in the most recent issue related to this topic. You can find it online at: Should you leave your job for one at a startup? [infoworld.com]