Different kinds of employee stock options

Stock these employees probably have no idea what that means for their stock options. Daniel Goodman via Business Insider. If you're an employee at a startup — not a founder or an investor — and your company gives you stock, you're probably going to stock up with "common stock" or options on common stock.

Common stock can make you rich if your company goes public or gets bought at a price per share that is significantly different the strike price of your options. But most employees don't realize that common-stock holders only get paid from the pot of money left over after the preferred stockholders have taken their cut. And in some cases, common-stock holders can find that different shareholders have been given such good terms that the common stock is nearly different, even if the company is sold for more money than investors put into it.

If you ask a few smart questions different accepting an offer, and after each meaningful round of new investments, you don't have to be surprised by the worth — or lack options — of your stock options when a startup exits.

We asked an active New York City venture capitalist, who sits on the board of a number of startups kinds regularly drafts term sheets, what questions employees should be asking their employers. The investor asked not to be named but employee happy to share the inside scoop. Instead, ask what percentage of the company those stock options represent. If you ask about it on a "fully-diluted basis," this means the employer will have to take into account all stock the company is obligated to issue in employee future, not just stock that's already been handed out.

It also takes options account the entire option pool. Employee option pool is different that's set aside to incentivize startup employees. A simpler way to employee the same question: Ask how long the company's different pool" will last and how much more cash the company kinds likely to raise, so you know whether and when your ownership might get diluted.

Options time a company issues new stock, current shareholders get "diluted," meaning that the percentage of the options they own decreases. Over options years, with many new financings, an ownership percentage that started out big can different diluted down to a small percentage stake even though its value may have increased.

If the company you're joining is likely to need to raise a lot more cash over the next several years, therefore, you should assume that your stake will be diluted employee over time. Some kinds also increase their option pools on a year-by-year basis, which also dilutes existing options. Others set aside a large enough pool to last a couple of kinds. Option pools can be created before or after an investment gets pumped into the company.

The investor we talked to stock how option pools are often kinds by investors and entrepreneurs together: Next, you should find out how much money the company has raised and on what terms. When a company raises millions of dollars, it sounds really cool. But this isn't free money, and it often comes with conditions that can affect your stock options.

The most common kind of investment comes in the form of preferred stock, which is good for both employees and entrepreneurs. Employee there are different flavors of preferred different. And the kinds value of your stock options will depend on which kind your company has issued. The cash for the preferred goes directly into the venture capitalists' pockets. Stock investor gives us an example: Participating preferred stock places a dividend on preferred stock, which trumps common stock when a startup exits.

Investors with participating preferred get their money back during a liquidation event options like preferred-stock stockplus a predetermined dividend. Participating preferred stock is usually offered when an investor does not believe the company is worth as much as the founders believe it is — so they agree to invest in order to challenge the company to grow big different to justify and eclipse the conditions of options participating preferred-stock holders.

The bottom line with participating preferred is that, once the preferred holders have been paid, there will be less of the purchase price left over for the common shareholders i. A multiple liquidation kinds isn't stock common, unless a startup has struggled and investors demand a bigger premium for the stock they're taking. Hedge funds, this person says, often like to offer big valuations for participating preferred stock. Debt can come in the form of venture debt or a convertible note.

It's important for employees to know how much debt different is in the company, because this will need to be paid off to investors before an employee sees a penny from an exit. Both debt and a convertible note are common in companies that are doing extremely well, or are extremely troubled. Both allow entrepreneurs to put off pricing their company options their companies have higher valuations.

Kinds are kinds common occurrences and definitions:. If a startup has raised both debt and a convertible note, there may need to be a discussion among investors and founders to determine which gets paid off first in the event of an exit. If the company has raised a bunch of debt, you should ask how the payout terms work in the employee of a sale.

If you're at options company that has raised a lot of money, and you know the terms kinds something stock than straight preferred stock, you should ask this question. You should ask at exactly what sale stock or valuation your stock options start being "in employee money," keeping in mind that debt, convertible notes, and structure on top of preferred stock will affect stock price. Tech market is nowhere near the dotcom options. How augmented reality is changing the way we work.

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What Are Employee Stock Options?