Better Understanding Your Employee Stock Options

Good summary of stock options, but it leaves out some critical points. Namely that the amount of tax you pay depends a lot on when (and if) you choose to exercise your options. In order to get the best tax treatment, you have to own the shares for at least a year. Otherwise, it's basically treated like income. If your company is acquired for cash and you haven't purchased your shares, you will usually be cashed out immediately at the difference between the strike price and the purchase price.

In addition, you may owe tax at the time you exercise the options if your strike price is below the fair market value at the time of exercise (also depends on the type of options, there are two).

Also, you say that employees can't exercise options until they have vested. The truth is that you can early exercise if that's written into the stock plan. It makes things a tiny bit more complicated for the employer, but can provide a huge advantage to you. Many startup founders down't know about this, but will add it if you ask. Effectively you can buy all of your shares immediately, starting the capital gains clock ticking and eliminating any tax liability at purchase. If you leave, the company has the right to repurchase any unvested shares. The only downside is that you need to come up with some cash upfront.

It seems to boil down to having to trust your employer to be honest to their word (and implications) about stock options and what their value really is. Even in the most trusted of environments, I still would not fully trust what comes out of the mouth of the person I'm interviewing with since they cannot speak on behalf of any outside investors, (other) founders, or anyone else with a stake in the company.

Given the nature of 99.9% of employer/employee relations, especially in salary negotiation, I would never personally place any value in stock options of any sort. There is simply no verifiable way to calculate what they are worth with a million different ways for them to become worthless and no accountability for a company to be entirely forthcoming.