Chapter 9: Ownership vs Options

…they are different but treated equally in the negotiation game

There is one thing that is universal for most companies under the age of 5 — they know that, if they’re being responsible, they may have to convince people to join their company for a lesser salary.

The reality is, most young companies getting ready to scale need talent that falls into one of two categories:

• Individuals with a very specific talent — when a company is in a growth mode, they typically hire utility players that can float and do many things at once. They’re typically younger and excited to be a part of something new. As they gear up to scale they establish very specific needs resulting in very specific pointed hires with very specific skills — gone will be the days of letting people “try to learn” and high salaries will be sought after that have successfully mastered a craft
• Individuals who have scaled companies — these groups are more of a financial and professional investment that young companies hire with a hope that their experience will help them scale faster

For the record, I don’t agree with either group being focus hires for many reasons, but those stories are coming later, and regardless of these not being the best hires to make, they are some of the first when a company goes through a growth mode. They are also the most expensive. However, many companies going through a growth stage, while having funding, don’t always have a ton of budget for these hires and one way to lure them away from other jobs is equity or stock options.

These are not the same.

I can’t tell you how many conversations I’ve had with people who have taken roles because of great “stock options” and I’ve had to tell them that options aren’t real until you buy them and it could take you four years to be eligible to purchase.

Lets break it down: The term Equity can mean stock or shares. … Stock options give you the right to buy a certain number of shares at a certain price after a certain amount of time. They do not represent ownership until your right to buy them has vested. Equity investment means ownership in a company.

Vesting, normally, takes 4 years and that means four years working at the company. The cost to purchase your options also depends on the cost of the company unless negotiated in early (purchase price is normally apart of your agreement but always double check). In short, getting offers for options is essentially pointless as it’ll take years before you see the return. Equity, however, means ownership and ownership means a payout should the company sell for profit. Also, not guaranteed but a lot more promising than options.

Here’s the red flag — if you are being recruited for a role and they say “we can’t pay you at the salary you’re asking but we’ve increased your stock options to be 5,000 shares” this is not a replacement for money now and means you will be taking a pay cut to take the job. 4 years is a long time for a young company; it could close at any point no matter how promising it looks today (remember, I joined Knotel after they became a unicorn and a year later we filed bankruptcy — nothing is promised). You have to weigh that risk and look at it as a pay cut for the immediate future, not options in four years.

As a business coach, I tell my clients that if they’re going to offer employee incentives, ownership means more to employees, and ownership yields more results. But ownership to employees typically means less ownership for executives or founders and if you’re working for a founder who built a company to make money…chances are equity will be reserved for only the highest executives.

So, is this a runaway immediately red flag? No. BUT it is a do not fall for it red flag.

Let me give you a practical example.

In the past to years I have had the following stock options:

• 10,000 options at 4-year vesting — $20,000 pay cut
• 8,000 options at 3 years vesting — $8,000 pay cut
• 5,000 options at 4 years vesting — no pay cut but a company with a lot of bad press when I joined

All of those companies closed before my second year. I made nothing and if I had taken the first two, I would have taken a loss for no practical gain.

This isn’t to say that some risk isn’t worth it but be sure you understand what you’re taking — options don’t replace salary today, tomorrow, or even next year. If you think a company is worth it, go for it, but have the right information. And if you have the room and confidence to negotiate for more money or actual equity, take it. Ownership is always more valuable than an option that may or may not pan out.