Anyone who joins a tech startup has the same dream of the big win, as their ESOP’s (Employee Stock Option Plans) occasionally pay out huge dividends. Not to burst your bubble but, in the vast majority of cases, they turn out to be anything but successful.

Some startups have made early hire employees into millionaires. For example, think the dream of an early employee of  Google, Facebook, Pinterest etc.  Barring the big wins, though, the wins are more like this…‘the admin people can go on vacation, the low level employees can buy a car, the seniors can pay  for their house and the founders can take time off or have the opportunity to seed something  else.

Of course there are no guarantees. According to the Kauffman Foundation the number of competitors in the startup landscape has never been greater and the way your Stock Option Plan may pay out is as varied as the options below:

 A Fire Sale of Your Company

Your company is sold for its assets (intellectual property, distribution relationships, customer base) rather than its ongoing business. These are usually valued below the amount of money invested in the business, which results in the investors receiving all the proceeds because of their liquidation preference. Only a few senior members of management may receive a small share of the proceeds here. As well, few of the employees end up being retained since the buyer has no intention of maintaining or growing the business.

The Company is Purchased to Gain Access to Key Employees

Here the company is being purchased to recruit key employees rather than add a new line of business. Often acquirers use the acquisition-hire to bring on people they otherwise couldn’t attract, given the constraints of their pay and equity structure. Equity distributed in an ‘acqui-hire’ is often a few times as large as what an employee could expect to receive if she joined the acquiring firm through the normal recruiting process.

The Purchase of the Company at a Modest Price

This can be an attractive from a financial perspective for the rank and file employees, depending on how much capital has been raised and whether preferred shares have been granted. The less capital raised the better for the employees. In this scenario the acquirer often issues additional equity to the most valued employees to ensure they stick around for a while (golden handcuffs).

The Exceptional Price

The last scenario is the case where the acquiring company pays what many consider an outrageous price to buy a company that is of great strategic value. The acquired employees still have to vest their stock and are usually granted lots of autonomy.

Regardless of the outcome for your business, as you make the decision to join a firm there are 10 questions to ask to ensure you know what you’re getting into:

  1. What type of options have you been offered?
  2. How many options do you get?
  3. How many shares in the company are outstanding and how many have been approved?
  4. What is your strike price?
  5. How liquid are your options, or how liquid will they be?
  6. What is the vesting schedule for your shares?
  7. Will you get accelerated vesting if your company is acquired or merges with another company?
  8. How long must you hold your shares after an IPO, merger, or acquisition?
  9. When you exercise your options, do you need to pay with cash, or will the company float you the exercise price?
  10. What kinds of statements and forms do you get or do you need to fill out?

The vast majority of us will never see the payouts that we dream of, and that’s OK. But perhaps it’s time to consider other options besides the Stock Option Plan model that exists today. Perhaps we should look at offering a cash bonus when a company gets sold, or an ETOP (Employee Time-Off Program).

Food for thought, as we chase the dream…but just remember to ask the questions!