Understanding Your Employee Stock Options

Today we're going to talk about employee stock option plans.

Difference between options & shares

Before we get into that, I'm just going to break down what the difference is between options and shares. So shares quite simply they represent an ownership stake in a company. So say a company has 100 shares that means there are 100 ownership stakes in that company and each of those shares is going to be worth 1% of the company. So whereas an option, an option is a right to purchase one of those shares in the company. It's not an obligation to purchase them when you receive options, you're holding that ability to purchase shares in the company at a later date and generally how options work is that they have a strike price; a strike price or also called an exercise price and that price is going to be, hopefully below what the market value of the shares is.

How to make sense of your startup employee stock option package

For early-stage startups, offering employee stock options can be a key part of attracting and keeping key talent. A stock option is an agreement that gives an employee the right to buy shares in the company at a discounted rate.For the employee on the receiving end, making sense of a complex, jargon-heavy stock option offer can be daunting. Given that such shares can carry significant risk - with startups often having poor survival ratings - it is very important to properly evaluate your stock option offer.Here is a guide to making sense of your stock option offer.

First, do a basic assessment of the company

The first step is to conduct a basic assessment of the company. This is key to understanding the risk involved with any stock option plan.At what stage of investment is the company at? Is the company a pre-seed investment? If yes, you need to understand that this is the highest-risk stage of a company lifecycle. 90% of new companies never get to VC funding and founders can be delusional about their prospects for investment. So take any claims that a company has a large, interested investor with a grain of salt.