Disclaimer: My knowledge here is limited and I’m just sharing my experience. Please report any errors and the post will be updated accordingly.
I’ve been talking to a lot of companies since I left my job at Fybr, and some of those conversations end up at compensations and perks - mainly Stock Options. It was sold to me multiple times as something immensely valuable and I hope to clarify some nuances with this post.
A stock option is an opportunity to buy a certain number of stocks at a reduced price than the ‘Fair Market Value (FMV)’. Buying this stock for the specified amount is called ‘Exercising’ and this can be done for a period of typically up to 3 months after the employee leaves the company, known as the ‘window period’.
Imagine this scenario:
The company valued at $10M, which has 10M outstanding stocks worth a $1 each. The employee gets option is to buy up to 10K stocks for 1$ each, roughly 0.01% of the company. Assume a salary of $35000, roughly ₹23,00,000. 100% of it gets vested over the next 4 years and the employee wants to leave. The company did really well and current stock value is $20.
Exercising the stock is considered as capital gain in India and employees have to pay tax on the gain [3], [4], [5] even though you don’t actually have so much money. Yep, sucks.
Cost of buying the stocks = 10k * $1
= $10,000
Taxes on capital gain = (20 - 1) * 10K * 30%
= $57,000
Yes, the taxes that needs to be paid to buy the options might make buying them impossible. It’s roughly 40% of all the money you earned in last 4 years.
So what if you can’t buy it? Here are the few scenarios.
-
You are going to lose your options in 3 months and you will effectively have nothing. (Disclaimer: I’ve been in this situation and hence the post)
-
The company goes public, which realistically is not going to happen.
-
The company gets acquired - which typically just extends the vesting period by another few years.
The only scenario I can think of in which stock options are going to be of any use is if the window period is significantly long - a few years at least and a lot of organizations are doing it - For example Quora and Asana does it for 10 years and Pinterest for 7.
Zach Holman wrote more about the topic better than I could ever do. Julia’s articles on negotiating the offer and stock options are pretty great as well.
Most probably that 0.01% is worthless.
Edits
1: Saju mentioned how some companies have accelerated vesting in events like acquisitions. I don’t understand the complete implications - so more information is welcome.
2: Linked to posts by Zack Holman
See the complete revision history