I am currently thinking to accept a job offer from a company that, as an incentive, is giving me also 10K pounds in stock options with a vesting period of 3 years.

In the offer I received, it does not say much more. Wouldn't be fair to tell me the percentage of the company that corresponds to these options? Otherwise, how can I evaluate these options if I do not know if I will have the right to buy 1% or 0.001% of the company?

The company is private and its current value is not known.

  • Why do you care how much of the company you can "buy"? You get a certain number of shares, what difference does it make to you whether that is 1% or 10%? Pardon my ignorance, I don't see the relevance of that percentage. – Masked Man Nov 11 '17 at 17:33
  • When you say 10k pounds, do you mean 10,000 shares? Or is the total strike price 10k quid? – user1008090 Nov 11 '17 at 17:35
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    @Masked Man : The OP can get some idea of dilution. E.g., if they offer 10k shares and there are 100 million shares then there likely will be a reverse split before any IPO or other harvest event (unless the company will IPO in the $billion plus range). There are no hard and fast rules for this, unfortunately, but one can get a ball park idea of ultimate share value. Edit: Ignore me, just read what Joe Strazzere said. – user1008090 Nov 11 '17 at 17:37
  • I am genuinely ignorant of how this works ... How does any of that help the OP? I am probably being naive or stupid, but I don't see how N number of shares is worth anything more or less than the market value of N shares, irrespective of how many other shares exist. – Masked Man Nov 11 '17 at 17:41
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    @MaskedMan If the company is currently private there may not be a publicly known market value. The OP has to estimate the value of the stock options based on very limited data. – Patricia Shanahan Nov 11 '17 at 18:30

So they company has offered you 10K gbp worth of options, vesting in 3 years.

What this means is that in three years, assuming you are still with the company, you will have the right - not the obligation - to buy shares in the company at the price indicated in the option, the exercise price (aka the strike price).

You currently have been given 10K gbp worth of options - it's tricky to say how these options were valued but I guess that isn't important.

What is important is understanding what is going on - the firm that is trying to hire you is offering you an incentive, and it is up to you to work out how much that incentive is worth compared to other places.

For example - let's say this place A is offering you 20 K / year and 10K of options, while place B (paying market rates) pays 40 K / year.

In the three years, assuming no real change in salary, in place A you have 60K and the options, while elsewhere you have 120K.

That means the options are worth - or must be worth - 60K in three years for you to consider taking this offer. But that's silly - you wouldn't take the risk of the options being worth 60K to not actually make any money (why take the risk, just take the market price!).

So instead you would want, based on your tolerance for risk, to find options worth, say, 180K. So that in three years you have doubled what you would earn in the market. Not bad.

Now you want to ask the company what the expected value of the options in three years is. You can ask that, of course, but more importantly you want to find out what the growth of the company is, what the success of the company has been, and from that work out how likely it is that the options will be worth more money. Do they have graphs of revenue/customer growth (they do), do they have expected new revenue streams (one hopes so!).

Finally, let's assume the value of the options is based on the company shares being worth currently 1.01, and the option strike being 0.01 (option value of 1 gbp and you own 10,000). In three years, if the company shares go to 18.01, each option you have creates a value for you of 18 gbp. So you have your 180K gbp! On the other hand, if the strike is 119.00, and the stock is at 120.00 (option value of 1 gbp and you own 10,000), then the stock needs to go to 137.00 for you to have your 180K. What this means is that the strike price of the option and the current stock price are important factors for you to consider when working out what the growth trajectory of the company will have to be in order for the options to be worht some value. An 18 fold increase in a share price is unbelievably hard - but increasing it only 14% is very, very reasonable.

Finally - the company is private but its value is known. The investors and management have a very clear idea of what the company is worth - each share will have a value, and there will be some known number of shares.

Another answerer mentions liquidation preferences - Liquidation preferences protect the investors in the company (not you, not the CEO - rather the people who front money for the company) by giving them preferential treatment in the event of a major activity - like selling the company. If the company sells for less than some amount, effectively the liquidation preference comes into play.

An example can be found here - https://www.feld.com/archives/2004/07/liquidation-preferences.html

Generally you won't be too worried about liquidation preferences, if only because it's unlikely they are going to be shared with you. In any event, they are (generally, unless your CEO is an idiot) only for under-performing companies. What you want to find out from the company is, to you, how likely it seems that the company will be able to move the stock price by whatever % it needs to within 3 years to get you the money you need to take on the risk of working at this place.

  • Your ignoring any tax and NI due and how UK Option schemes differ from the USA SAYE in particular is very diferent – Neuromancer Nov 13 '17 at 0:07
  • @Neuromancer what? I'm not a financial advisor, and the OP didn't ask about differing tax schemes - simply how to value the stock option offering. I don't think the OP, based in the UK, cares much about different taxation schemes in different countries. Even if OP did, I don't know anything about them. – bharal Nov 13 '17 at 2:47
  • well why did you answer the q by referring to the USA and not mentioning any of the UK schemes? and paying tax at up to 65% is part of how you value options an din the uk most of the schemes ban the issueing of diferent share classes to employees – Neuromancer Nov 13 '17 at 16:36
  • @Neuromancer where did i refer to the USA? And why would anyone pay tax at 65% in the UK? The highest rate is 45%... but in any event capital gains tax in the UK is between 18 & 28%... but even so, OP didn't ask about taxation. – bharal Nov 14 '17 at 0:24
  • income tax plus NI the HMRC guide explicitly states that – Neuromancer Nov 14 '17 at 11:42

Assuming this is in the UK from the use of £,

  • Is it an "HMRC approved plan"? i.e. on of the following :
    Share Incentive Plan (SIP)
    Save as you Earn (SAYE)
    Company Share Option Plan (CSOP)
    Enterprise Management Incentive (EMI) )

  • What % of the company is this?

  • Are there any liquidation preferences, i.e. if the company is bought who gets payed out before you - which can mean your shares are worthless?

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