Employee Stock Options—The Last Legal Way to Screw Your Talent

Screwed?

Wow mom! I just joined a startup and they are giving me 10,000 stock options.

Everyone seems to know somebody who works for a tech company and has stock options. And likely everyone knows someone who experienced a “liquidity event” and those 10,000 options did not buy lunch.

Why?

Stock options are one of the few really seedy, low brow ways for a company to legally screw an employee. Why? Because they do not allow employees to see the DENOMINATOR.

Every fraction has a numerator. That is the number on top for the math challenged and those in MarCom. Then there is the denominator—the lower number of the fraction.

So if the denominator is low, those options are worth a lot. You just got a slice of pizza from a large pizza and you are not going hungry. Then there are those who have that denominator of 150 million shares. “What,” you say? Who has 150 million shares? IBM, GM, those companies, right?

No—it is your lowly startup with 125 people, a hundred customers.

And then there is the OTHER denominator—the preferences one.

Wait, so you are telling me I own 10,000 slices of a pizza from a pie sliced 150 million times? So if the company sells for $150 million, I get $10,000? That’s all? I work nights and weekends and I get 10 grand?

No, you get far less. Because there is preferred stock and common. You, my dear, have common. The preferred means there are other divisors here.

So that 150 million shares is BEFORE the preferences kick in. Who has the preferences? Well, those great “partner” venture capital guys who visit the office, tell the employees about how great they are and to keep it up.

Those preferences can double that 150 million shares to 300 million shares. How do those 10,000 shares look now? 300 million shares, fully diluted means the C level guys have to sell this baby for $300 million for you go get 10 grand. Not so hot, you say?

You really think that crappy place you work will ever sell for $300 million?

So stock options are a slice of pizza—but your friendly management does not allow you to know how big the pie is nor how many slices are being cut. So bring along extra lunch money.

How do you find out? Here is where you learn if your management is ethical or not. Ask your CEO or CFO.

“So Jack, how many fully diluted shares do we have out there?” Fully diluted means all the denominators are now in play.

“Oh dear option holder. We are a private company and we do not give out that financial information.”

Really? Try that as a public company and you get to visit Bernie Madoff – types in jail.  No ethical CEO or CFO should ever keep this information from an option buyer. But they do.

Bet you are not going to get the answer. The management will almost never tell the employees how many true shares are outstanding.

This is completely legal but totally unethical.

Then there is that moment to buy those options for 15 cents each. Well 10,000 options is a $1,500 check the management will let you write without knowing the value of what you are buying. This is how you legally screw your talent, especially the young ones who are new to this low game.

When you have those weekly get-togethers, where management tells the employees the state of development, sales, marketing and shows them the expenses, they do not seem to want to show the dilution. They buy your lunch, and they eat yours.

You will hear all the crap about “our great culture,” “how we value employees,” “we treat our employees as family.” Sure, until it is time to let them know just how screwed they are with their almost worthless stock options.

If your management will not tell you what your options are really worth, skip the crap at the weekly meetings about culture and values. Because they have neither.