You’ve heard the stories about people who were offered stock options at Silicon Valley startups and became millionaires within four short years. So why would you say no?
First, a primer: Stock options allow — but don’t require — an employee to buy shares of a company’s stock at a fixed rate called the strike price. Often, the longer the employee is with the company, the more options they receive, and thus, the more stock they can buy. If the market price of the stock rises above the strike price, the employee can potentially make a lot of money.
So say you get hired at Wolf of Wall Street Inc., and you’re offered the option to buy 1,000 shares at $100 a share, after you work for the company for four years. Maybe after a year, you can buy 250 shares. After two years, you can buy 500 shares, and in four years, you’re allowed to buy all the shares for $100 a pop.
If the shares are now worth, say, $500, and you buy them at the promised $100 each, you can turn around and sell them at the current price, making a $400,000 profit. Sounds great, right? Not so fast.Many startups or smaller companies offer stock options instead of salaries, or to compensate for pay cuts. Seriously, even if your employer is Leo diCaprio: This is when you say no to stock options.
Larger companies offer stock options too, but usually they do it to retain employees and to incentivize the employee to work harder (you do well, they company does well, and you make more money).
But smaller companies sometimes offer options because they can’t afford to pay people at first, but are hoping they’ll become the next Google.
This is risky. Sure, the company could take off, and you could make a fortune. But the company could also fold or stay stagnant, which would make your options worthless. Or you could lose the job or decide to leave the company before the vesting period, and again, be out the money for work you did.
Bottom line: Stock options should be a perk, not the bulk of your pay. If your salary is on par with salaries across the industry, and you have stock options, great! You have little to lose. But if you’re essentially being paid in stock options? Walk away. You may end up not getting paid at all.