My offer letter doesn’t reflect what was discussed. What should I do?

Question

I recently received an offer from a small tech start up that just received a round of funding to be their founding sales rep. It’s exciting and I verbally accepted the offer, however when I received the offer in writing, it reflected a different agreement regarding my equity in the company. The way it was presented to me on the phone was that I would be receiving 8,000 shares in the company that would be distributed over time. But on the offer letter it’s listed as options, not shares, meaning I would have to buy into the company to get equity. Big difference I believe. Am I being too nit picky or is this a big deal and worth saying something? They are wanting to move fast and I want to make sure I’m making the right decision so any help would be greatly appreciate.

Answer 1

Call them and get clarification.

Call them up and tell them you thought you were getting equity rather than options.

How big the difference is depends very much on the price at which you will be offered the options. If it's very low then it's essentially like being given shares. If it's very high then it's little value. Hopefully that is spelled out in the offer letter.

EDIT: Based on the information that this is really an "option" and that "the price will be set by the board of directors", my advice is that this is not a serious part of your compensation. It's icing on the cake, but it's not a part of the cake itself. The directors can choose to make this option very valuable or almost entirely worthless, depending on how they feel. There may be wording that restricts the board to something like a "fair" price, which makes the situation better. Get the company to give you a detailed description of how the options work.

Also "8000 shares" tells you nothing without knowing how many shares of the company exist. It might be 50% of the company, but it might also be 0.05% of the company. Definitely ask how many shares there are and if there are plans to increase that number before you exercise your option. Also ask what the value of each share is now.

Having said that, being in at the ground floor on the ownership of a new company may give you the chance of becoming extremely rich if the company does well. Maybe.

Answer 2

tl,dr: Stock plans are complicated. Before you engage make sure you read the documentation for the employee stock plan and make sure you understand fully. Ask an adviser if you need to. It's possible that options are better.

Big difference I believe.

Yes, but make sure you fully understand which one is better. A location tag would have really helped here.

In the US options (and specifically ISO options) are the "normal" way of managing equity for startup hires. This is simply because options are arguably better for anyone involved especially if the stock is not traded publicly.

The main is reason is tax treatment. Direct stock grants are taxable as income the moment you receive them even if you can't do anything with the stock. Let's say you get 8000 shares at a strike price of $1. If you are in the 22% bracket you will have to pay $1760 on income tax on the stock. If the stock later tanks or the company goes under, you get nothing in return. You may be able to claim this as capital losses in the future but that's complicated.

With ISO options, you don't pay any taxes on the grant or the exercise (disregarding AMT for now). You only pay taxes when you sell and this point you have an actual gain to show for it.

It's entirely possible that person on the phone was just sloppy when they made the offer. Since options are the standard, may have assumed that you knew this and when they said "you'll get 8000 shares over 4 years" they meant "you get 8000 options that will vest over 4 years".

Answer 3

The only thing that counts is what is in writing, in the offer letter. Recall the saying that a verbal promise is not worth the paper it is written on. Call them, ask for clarification and carefully check that everything that is important to you actually ends up in the offer letter in writing. If they tell you verbally you get shares and the offer letter says options you will get options.

Answer 4

Inform them that there is a mistake in the written offer because it does not reflect what was verbally agreed upon and send them a correction with the terms as you understood them.

Then the ball is in their court again. They might retract their offer and make a new one that is closer to yours, or insist on their original offer. What to do with that is up to you.

But keep in mind that shares in a startup are usually not a very good deal and should never be considered an alternative to a fair market-rate salary. The reason is that the future of a startup is (despite what the founders will probably claim) in most cases very uncertain. First of all, most startups fail within the first couple years, turning all the shares into garbage. But even if you believe that this startup is different and will certainly succeed, there is a lot they can do later that could make your shares worthless. For example, they could issue more shares later that dilute yours to a negligible value. Or they could merge and split and restructure their company empire a couple times, and in the end the company your shares are in isn't the one you work for anymore. Or where the money is made. Or that still exists.

So receiving shares in a startup is probably not a hill you want to die on. Salary is, though.

Answer 5

Just one dimension that hasn't been touched on here yet:

Regardless of the realities surrounding the shares vs options at this company, I think the most important dimension of this situation is that you and your future employer establish a precedent for having difficult conversations naturally, quickly getting on the same page, and working together for mutual benefit. Neither one of you wants to START your relationship with a disagreement. That could lead to one or both of you seeing your interaction as transactional instead of rich and interdependent. As a result, I would recommend:

1. Talk to them quickly. Don't let the matter fester. Don't ruminate over what they might be thinking or how things could go. Nip those kinds of things in the bud and go have an open conversation.
2. Give them all the benefit of the doubt. In fact, go into this thinking things like, "They really want to give me the best they can," "They want a founding sales rep. who is THRILLED to be here," and "If I really needed something difficult here, they would bend quite a bit to make it happen for me." I suppose it's 10% possible that they only want to bring you on because they're desperate to manipulate someone into the position who will feel contractually obligated to sell their product, or who believes in the product but not the company. Eww. Especially given that you're the founding sales rep., I'm fairly confident they want you to love everything about this opportunity, and even though there are some grim realities associated with startups, they want to face them WITH you, not just dump them on you.
3. Don't shortchange your needs and desires, just because you're respecting theirs. Let's suppose shares really are better than options, and significantly so. Don't be afraid to communicate disappointment, hope for a different arrangement, the need for reconciling their written statement with the previous commitment, etc. It's totally ok to verbalize your needs kindly and wholeheartedly, while simultaneously acknowledging their limitations and the potential difficulties in granting your requests.

A quick principle to remember is to solve this problem as if you were seated side by side at a table looking down at a difficult challenge, rather than as if you were seated across from each other you each were the other's challenge. That's the way you want to address all of your problems at your new company. Make sure to start off on a great foot.

Answer 6

It is normal for startups to offer options rather than shares.

The problem is that before they go public/private there is no market to bye sell the shares so exchanging the shares for actual currency is hard (and is not going to give you what the company says they are worth).

But on the other hand if you receive shares to the IRS these have value (its not their fault you can't convert the value) and thus you will owe taxes on them. This means before the company goes public these are a liability (as you have to pay taxes but can't convert to currency to pay those taxes).

Thus before going public startups usually offer options rather than shares. As options don't have any real value until you convert those options, there is no tax liability until you can sell.

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The value of the shares. Unknowable until the company is sold.

But usually the company sets the option "grant" value at the company valuation (as filed in some federal form) divided by the number of common shares. This is why you hae the phrase "the price will be set by the board of directors" they follow this formula.

Your value is how much this value increases over time. Unless you are in the first 10 employees (or exceedingly lucky) this is not going to be a huge amount some nice icing in about 10 years time (if you stay that long (probably not)).

Answer 7

Here is a different take...

I think it depends on what the subjective understanding was during the phone call. If it was reasonably clear to both parties that the verbal agreement was that you would be given "shares," i.e. equity, and then in the follow-up written agreement of the offer letter, it was switched to options, which the other answers have established is not a significant part of or consideration in your total compensation package, then I think that act could very possibly indicate a less than sincere or honest act by the company.

But it depends very much on what your (and their) understanding was, how confident you were in your understanding that it would be shares vs. options, and how deliberate the discrepancy in the offer letter difference was.

In other words, if it was clear that you were told unambiguously that you would be given equity shares, and then without follow-up, mention, or further discussion, it was unceremoniously changed to options that have much less value, then that would be a big red flag that the company behind the offer is acting in a dishonest way right off the bat. And if so, that upfront dishonesty should be a big part of your consideration of whether to take the offer or go somewhere else.

Or beyond just blatant dishonesty, it could even potentially be a sign that the person making you the equity shares offer didn't have the authority to do so, was overridden in between their verbal offer and the actual written one, and didn't display the forthrightness to inform you of the distinction. But I've gotten off into speculation at this point.