Potential Money
The smell is everywhere nowadays in the Valley -money. Well, not REAL money, not the stuff that new Porsches and houses in Los Altos Hills are made of. This money is Potential Money, sort of like the concept of Potential Energy some of us dealt with in Physics 101. Potential Money is there in the form of unvested Stock Options. You Java hackers know -the reason you work the 15 hour days for less pay than you got at HP, while enjoying the commute to a dirty tilt-up in east Santa Clara. Yep, Stock Options.

But, options are where it's at. Got this paper that says I will own 40,000 shares of stock when I am fully vested. See, right there in large print on the options agreement. What about the small print? Hey, I can't worry about that, I'm too busy this week trying to sort out Java AWT.

Well folks, you need to worry. The stock certificates that you sweat for are either your ticket to that red Porsche or a pile of ugly wallpaper. And guess what, 95% of you all in start ups have ugly wall paper.

But hey, it says here I have 40K shares. All we have to do is go public... well, maybe we get bought by Cisco, Sun or some other monolith with serious cash. Just as good as an IPO... come to think of it, we probably won't go public because I overheard a VP telling a buddy of his that none of the companies that do things we do have gone public, they usually get bought. Something about pushing the envelope on the Red Herring, whatever that is.

So we get bought, no big deal? I will get Cisco's stock and Cisco's paper is as good as cash. OK, quit nagging me, I will check the small print on my option agreement... let's see... ah, here it is:
1. Options are vested per schedule starting with IPO.
2. Options granted are Class C Options (founders and investors have Class A and B options).
3. Options are only valid for IPO (going public).
4. Options' value in the case of acquisition or merger is determined by the Board of Directors.

Wait a minute! If we aren't going to IPO, then what do I get in a buyout? What does this mean?

It means that you have been working a lot of hours for little pay. The above scenario is very typical of what is happening now, especially in the Internet market. Consider the fact that the founders, investors and Board of Directors have a different class of options than you do and those classes may be better in case of a buyout. Obviously, the founders and investors have taken BIG risks in starting a company and it is only fair that they have a big upside for themselves.

So what do you, hard working Java hacker, get? Whatever you negotiate up front! Maybe the founders are good people and care about you. But if the price of taking care of you hurts the sale of the company, you could end up with a pile of ugly wallpaper. Negotiate up front! You may not get exactly what you want, but at least you will KNOW what you are getting. Finally, a real reason to know a lawyer.

I recently met a very intelligent lady who was interviewing at a very hot Internet company. She stayed awake during her Corporate Finance classes and knew coming in that the company would be looking for a buyer, not an IPO. Most of her potential compatriots knew it also. She read the stock option agreement. It read much like the example above. When she asked the CFO (Chief Financial Officer) for clarification he said yes, if our company gets bought, you get whatever the board decides you get. And yes, the board members and executive staff have better terms than the other employees do.

"Who in their right mind would work 20 hour days with that kind of option agreement?" my friend asked.

"Well," the CFO said, "everybody, as you are the FIRST of our 100+ employees who has even questioned the agreement. Besides, we are getting 500 unsolicited resumes a month, so the stock option agreement is obviously not an issue." The CFO is not worried because he negotiated a very good option package, including provisions for a buyout, for himself.

Startups are fun, but go in with your eyes open and take care of yourself.