by David E. Gumpert
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Sure, I know you're trying to get rich. But more to the point, you are trying to accomplish two other things:
- You're trying to gain ownership in a company that is going to be worth lots of money in the not-too-distant future.
- You're trying to gain ownership in a company whose stock you can sell and convert into cash in the not-too-distant future, sometimes referred to as gaining liquidity.
Achieving one of these goals without the other won't get you rich. Gaining options to purchase stock in a company that's already public provides liquidity, but that liquidity means nothing if the stock goes down because the company has been mismanaged. And obtaining stock in a fast-growing private company controlled by an individual who has no intention of making the stock easily sellable in the not-too-distant future will likely frustrate you -- "water, water everywhere, but not a drop to drink," as Coleridge laments in the classic, The Rime of the Ancient Mariner.
Of course, if a company is already publicly held, then the question of liquidity doesn't apply, since its stock is liquid. The key question for such a company is how well its stock will appreciate over the coming one to three years. If a company is publicly held, its financial and other operating information is publicly available.
As you go through the process of evaluating companies with which to be involved, you'll discover that most companies fail to pass muster on both these questions. And remember, these are just your very initial screening criteria.
What Are the Equity Sweet Spots?
As you examine potential employers that seem to be saying the right things with regard to their growth prospects and liquidity orientation, and are willing to make options available, you should be thinking about timing, as in: When will any options I am granted be likeliest to have significant value?
The situations for which you should most be on the lookout are those that provide a valuation to stock that previously hasn't been fairly valued. These include:
- An initial public offering (IPO). In terms of valuation increases, this is usually the premier event. A lawyer I know well who long specialized in handling small-company initial public offerings (IPOs) once said to me: "You get the best valuations from a public offering because the general public is much less sophisticated than professional investors." During 1999, IPOs showed an average of 60% gains during their first day of trading, while during the first couple of months of 2000, the first-day gains were about 100%, according to The New York Times of March 19, 2000.
- An acquisition. Generally speaking, an acquisition is the second-most desirable event to occur. In its best form, a publicly-held company acquires the organization in which you hold options for a combination of cash and stock. That way, you get some initial cash, plus an opportunity to see additional gains from the new stock you obtain.
- Private investment. While this usually isn't a liquidity event for the shareholders, it often precedes one by a relatively short time span -- say one to three years. It also has the advantage of attaching a value to the shares on which you have options. If you have options available at 10 cents a share, and venture capitalists invest at a valuation of $1.00 a share, you know your shares already have achieved a ten-fold increase in value -- on paper, at least. If things continue to go well, an IPO or acquisition will occur with an even higher valuation.
- A sharp dip in stock markets. Remember -- the idea here is to get options at low prices, and eventually sell the stock at high prices. If you are taking a job with a publicly-held company, the best time to sign on is when the company's stock is very low, because the options you receive will be exercisable at the low price. Even if you are already working for a publicly-held company, a sharp dip in its stock price could be a good time to seek out a raise-in the form of additional stock options. Another approach is to convince your employer to reprice your options, but this is usually a more difficult task since repricing options downward requires companies to make an accounting adjustment that can adversely affect profits. An excellent time for many employees to seek out additional options occurred during the spring of 2000, when the NASDAQ market plummeted during March and April. And a number of companies repriced employees' options downward in the interests of retaining valued people.
How Attractive Are You as an "Option Employee"?
You can do all kinds of investigating and analysis, but if your chosen company isn't willing to extend you an offer, then it's all for naught.
Moreover, once you get an offer, you want to be sure you maximize the amount of equity you receive. You don't want to sign on for options on 10,000 shares when you could have obtained options on 20,000 shares just by negotiating harder.
The key here is convincing your chosen company of two things:
- That you are an "option type employee." Remember -- you are an "investor," providing skills, creativity, experience, and commitment rather than money. Part of your challenge is convincing your targeted companies that you have all these attributes in spades, because these are the attributes they are seeking. They want to know that the options they provide will indeed motivate you. The companies that offer the most obviously attractive stock options are often the toughest ones to gain attention from because the competition is so intense.
- That it needs you in the worst way. Your goal is to maximize the "salivation factor." Because the most promising companies are growing quickly, they nearly always have "people holes" to fill. Depending on how dire their need to fill a particular hole is, and how attractive you look, you'll get them salivating.
Putting It All Together
The decision-making around these matters -- which job to take, how many options you should receive, whether a candidate company is really poised to make it big -- can be very tricky.
You may be wondering at this point about proper form. Do you investigate first to choose candidate companies or do you go after interesting job prospects first and then investigate? There is no easy answer to this question.
My advice is to do both. If you read about an interesting company in the local paper that you think might need your skills, you may want to investigate further -- look at its Web site, check out other articles about the company -- and then apply. Yet, there's no reason you shouldn't be willing to explore a particularly attractive job opportunity without first knowing a great deal about the company.
Part 2 >>
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