What's Your Worth In Stock Options?
By David E. Gumpert, as written in The Wall Street Journal
As stock options become an increasingly important part of employment packages, executives and other employees are being called upon to attach a value to themselves, not only in salary dollars, but in terms of equity incentives like stock options and restricted stock. (Stock options provide an opportunity to acquire stock at a predetermined price over a set period of time, usually one to three years; restricted stock is made available immediately, but carries restrictions as to when it can be sold.)
When it comes to equity incentives, you may be more valuable than you think. In today’s job market, with the unemployment rate having dipped under 2% in some areas of the country, the biggest problem facing many young, growing companies -- companies with equity that's likely to increase sharply in value -- is finding the people they need. As a result, entrepreneurs are becoming more generous in making equity available to key executives and employees, not because the companies have suddenly become more charitable, but because they’re reacting to a marketplace in which labor is a scarce resource.
So the key question you need to ask yourself as you become serious with a potential employer is this: How vital are you to the company?
The more vital you are, the more valuable a package you can negotiate.
Of course, from the viewpoint of you -- the prospective employee -- the hardest part of the process is determining just how valuable you are, and how determinedly you can hold out. Keep in mind, however, that negotiating options isn’t necessarily a onetime affair. If you determine that your value to the company is higher than you originally thought, you can -- as part of your salary review process -- attempt to negotiate additional options. You generally have less leverage at this point, since you’re already employed and it would probably be a hassle to leave, but especially valuable employees have used this approach to add to their options packages.
Here are the two likeliest scenarios that will help you determine your value:
You’re being recruited. This is the preferred scenario, since it tends to increase your value. Perhaps the company has heard about you, and has targeted you as perfect for a particular spot. Or it has hired a headhunter to fill a spot, and the recruiting firm has recommended you. In the latter situation, you may have offers from other companies via the recruiting firm, as well.
If such a situation comes to pass, you’re in the catbird seat. You’re being coveted, and you can play hard-to-get. In any negotiation, the easier it is for you to say no, the more leverage you have.
Consider George Shaheen, who left the chief executive position at Andersen Consulting in 1999, which paid him an estimated $4 million in annual salary and bonus, to take a job with an Internet-based grocery distributor, Webvan. According to the Feb. 7, 2000, issue of Fortune, he received an annual salary of only $750,000, but he was able to negotiate for 5% of Webvan in stock and options. By early 2000, about six months after Mr. Shaheen joined Webvan, the company had gone public, and his stock-option package was worth in excess of $90 million.
You’re in search of a job. Increasing numbers of managers in brick-and-mortar companies want to work for dot-coms and other potentially fast-growing companies. They apply to Yahoo!, Amazon.com, Lycos, and other big-name internet companies, not to mention other technology companies like Microsoft and Hewlett-Packard in droves. These companies have an insatiable appetite for professionals. But also, these companies have many more applicants than they could ever hire, so they can afford to be highly selective.
What that means is that if you’re fortunate enough to be offered a job, it will more likely be with the salary and stock options package pretty well fixed. If you’ve managed to entice the company with your skill set and you fill an important niche, and you also have another job offer, you may be able to increase the salary and options offer some. But you won’t have nearly the same kind of leverage as someone in the first category, who’s being actively pursued.
The Going Rates for Senior Executives
Increasingly, the competitive marketplace for top executives is pushing the bar for equity compensation upward. If you’re a candidate for a senior-executive position at a fast-growing company and you’re being actively recruited, here are some guidelines that recruiting firms and investors use for how much the individuals should expect to receive in stock options and restricted stock:
President and CEO: 6% - 10% of the company’s stock. The actual percentage usually depends on the company’s stage and stability when the new CEO signs up. The earlier in the company’s formation the new CEO signs on, the higher the percentage is likely to be. Executives with a well-known track records of success who can help convince venture capitalists to invest have maximum leverage.
Senior vice presidents: 1% - 3% of the company’s stock. Generally speaking, those with a marketing and sales experience are rewarded toward the higher range and those with a financial orientation toward the lower range. That’s because top-notch marketing and sales executives are just harder to find, and when they succeed, they add significantly to the bottom line. Financial executives are essential to reassure investors, but they usually can’t make a claim to increase sales.
Vice presidents and key managers: 0.5% - 2% of the company’s stock. A vice president of sales or a manager of technology would be likelier to command the higher end of this range, while a vice president of finance or manufacturing would probably be at the lower end. As in the case of senior vice presidents, those with marketing and sales expertise have the greatest amount of leverage.
Executives and managers below these senior levels usually receive something less than 0.5%.
It’s important to point out that these percentages can be misleading, and job seekers should use the guidelines with care. It’s easy to get caught up in setting a certain percentage stock goal for yourself because of what friends and acquaintances have received. The actual percentage of a company you obtain in options is much less important than its potential value. Having 10% of a company that’s unlikely to exceed $1 million in value is much less desirable than having 1% of a company that has a good chance of being worth $100 million.