Published on November 9th, 2004 by Alan L Sklover
ACTUAL CASE HISTORY: Evan, a biomedical research scientist with a large pharmaceutical company, was recruited by a fellow biomedical scientist to join him in running a start-up biotech firm. The biotech firm, funded by venture capitalists, was engaged in cutting-edge research on two promising drugs. The work was interesting, the pay was good, but something they offered was especially enticing: an ownership interest in the firm. This was the first time Evan had been close to an opportunity to really “make it big” if things went well. That is, if the company was successful, or sold, or especially if it went “IPO,” slang for “initial public offering,” Evan and his family could be financially comfortable for a long, long time.
The offer made to Evan – 100,000 stock options, vesting over a three-year period – seemed like a lot. But Evan was not business-oriented, and so he came to us for help in analysis and negotiation. We told Evan that we needed more information about the firm, but that even with more information, we probably couldn’t help him in the way he wanted.
Why not? Because options, shares of stock, and other ownership interests can be drastically devalued, even become meaningless, by later actions of those who control the company, and who may change its structure. For example, if you own 10,000 shares of a company, representing one-half ownership, and then 10 million new shares are issued to others, your investment went from 50% to less than one-tenth of one percent, that is, from meaningFULL to meaningLESS. Is there anything you can do? Sure there is, but it’s probably not quite what you expected.
LESSON TO LEARN: It’s not at all unusual for a client to ask a question like this: “They offered me 10,000 stock options…is that good?” The question could regard shares of stock, stock options, or such things as “share units,” “partnership points,” or some other kind of ownership interest. How can we evaluate the offer, without knowing more, such as the total number of shares outstanding, the option strike price, the vesting period, or any number of other critical facts, figures, terms and conditions? In workplace negotiating, there’s usually no opportunity to do a careful review of the applicable benefit plans and capital structure. And there’s rarely enough leverage to negotiate to restrict the right of the company’s owners to certain future actions. The answer to this question is to negotiate “relatively.”
This is how it goes: You can bet your bottom dollar that your boss, or interviewer, or your most successful colleague, negotiates pretty darn good for himself or herself. You can also count on the fact that you will in all probability not be able to get more options, or better terms of your options, than did your boss, or interviewer, or most successful colleague. What you need to do is this: ask for (a) the actual grant (number of options, stock, restricted stock, units, points, etc.), and (b) all terms applicable to your grant (of options, stock, etc.) “no less favorable in all respects relative to” that other person, or some other person in a similar position to yourself.
Surely, your boss may deserve a greater number of options, so you might request “no less than half of what you received when you came on board last year,” and “on terms and provisions just as sound and secure.” Perhaps try 2/3, or even 3/4. But use that person’s own treatment as a benchmark for yours; that’s the best way to make sure your 10,000 offered options is not 1/100 of what your colleagues received. And also, to make sure, for example, that your options don’t vest after 5 years, when their options fully vest after only 6 months. And if your boss is later given the right to purchase 100,000 more shares for one cent each, then you would get that same opportunity.
WHAT YOU CAN DO: If you’re put into the position of having to blindly evaluate such offers and grants, consider “relative” negotiating. Do so regarding both (a) quantity, and (b) terms and conditions, of the grant you are being offered. Numbers may be quantified as, perhaps, 75% of what your boss received, but terms (including confusing matters of vesting, strike price, additional rights, such as tag-a-long and drag-a-long rights, and anti-dilution protections) should be simply “no less favorable, in all respects” for you than they were for anyone else. This way, “wherever your most successful colleague goes — and hopefully it’s to riches and success — you’ll go right along with him or her,” and won’t be left behind.
Negotiating “relatively” is an example of the SkloverWorkingWisdom™ concept of “community,” that is, “if we all do well, I’ll do well, too.” Surely you should be motivated, incentivized and compensated for the group’s success, or the company’s success along with your colleagues. Why would it be any other way? Such “relative” negotiating is never foolproof, but is a very useful method to consider.
© 2004 Alan L. Sklover, All Rights Reserved.