Photo by Clemens van Lay on Unsplash

Options are not optional

They say that the day Facebook was listed, ten thousand new millionaires appeared in Silicon Valley. They were the early employees of Facebook that held options in the company.

Nevertheless, the concept of options is little understood in Europe. In many countries in Europe, the law did not keep pace with the tech market realities, and setting up an options plan is impossible or very complicated. The local culture is also more conservative and assumes that employees work for a salary, not for a stake in the company.

So, let’s start by defining the term:

An option is a right that individual employees and advisers have to buy shares in a company at a set price; the set price is very low (sometimes it is equal to the nominal value of the shares) compared to the market price that the shares may have in the future.

Practically, an early employee may have the right to pay €10 per share at the moment in the future when that share would have a market value of, let’s say, €10,000.

Consider this example:

A startup is valued at €2 million by its early investors. After the Seed round is closed, founders start hiring people. They offer a software engineer a salary of €36,000 per year, which is in the low range. But they try to compensate for this and incentivize the engineer with 1% options vested quarterly over four years. The 1% common stock is worth €20,000 when the offer is made (1% * 2 mil.), but it may be worth €200,000 in four years, should the company reach a valuation of €20 million by then. The €200,000 would represent €50,000 per year in addition to the €36,000 in salary, for total annual compensation of €86,000. Note that in this example, the 1% in options represents more than the salary, a 58% increase in compensation to be more precise.

The future is even brighter if we discuss truly successful startups such as UIPath. With such startups, the salary is dwarfed by the options’ value. Practically, no one ever became a millionaire from salary — still, options created many thousands of millionaires in the tech world.

The reality is that both founders and employees tend to minimize the importance of options.

As a founder, grant your employees options to:

Increase loyalty — options are a way to align the long-term interests of founders and key employees.

Test employee’s values — the good employees also have an entrepreneurial mindset; they embrace risks and seek the high rewards that an exit may bring. That’s why, as a founder, one needs to find, hire and retain employees that are willing to share part of the risks with the founders and accept options as the compensation component that may have the highest upside.

Attract talent — early-stage startups cannot compete with large corporations in paying the best talent. Compensate this with an appealing options plan.

Contribute to the ecosystem — employees that make millions from options turn into angels and advisers, contributing to the next cycle of investment and innovation. Europe needs this, which in the US is commonplace.

As an employee, ask for options to participate in the upside. Choose the startup carefully, and once you made your mind go all in. Get a salary and always ask for options; consider the options as an investment that you made into the startup of your choice. Be part of the story, internalize your role as a key member of the team, and make your best efforts to turn the company into a huge success.

In conclusion, options are not optional. They are a super-useful instrument that benefits both parties: founders and employees. Moreover, options are the incentive that turns the two parties into one team.

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Cristian Munteanu

Cristian Munteanu

Blogging about Startups and Venture Capital