How to Get a Piece of the Action

The First Option Is Stock Options

There's a big difference between wanting a piece of the action and getting it. Even the most hard-charging businesspeople can turn downright docile when it comes to cutting a smart deal for themselves. But the old saying has it right: "You don't get what you deserve; you get what you negotiate."

Gordon Gould is a case in point. He was making $62,000 a year as manager of online services for Sony Worldwide Networks. It was a responsible -- and demanding -- job. Then something changed. "It became difficult for me to really invest myself in a project," he explains. "I kept asking, Why should I work 16 hours a day to line someone else's pockets?"

So Gould decided to explore his options. One month later, he had increased his salary to $70,000 and owned 3.5% of a hot startup with big-name clients including the House of Blues and Universal Pictures. Gould fully expects Thinking Pictures to go public, and he hopes his stake will allow him to start "surfing the world" by his 35th birthday.

How did Gould get his piece of the action? First, he knew to ask -- actually, to insist. He vowed he would leave Sony only for a job with plenty of equity. "Companies capitalize on naiveté," he says. "They get lots of 20-year-olds who don't know any better. I figured you can't get if you don't ask."

He also knew how much to ask for. Gould networked with industry players and professional colleagues to determine the terms on which key contributors were joining other Silicon Alley startups. Then he set his sights on the maximum -- 5% of the company. "I negotiated from there," he says. "I stressed to people that I wasn't greedy, but that equity was important to me."

Finally, Gould got in at the right time. He was the third full-time employee of Thinking Pictures, and he joined the company before it received a major infusion of venture capital. That's important. "Companies give away stock left and right at the beginning," says Timothy Sparks, a partner with Wilson Sonsini Goodrich & Rosati, Silicon Valley's most prominent law firm. "They get more sophisticated as time goes on. And once the venture capitalists arrive, they oversee the process."

There's no question that stock options are the quickest way to get a piece of the action. They're also the riskiest. Before you catch startup fever, keep in mind four real-world cautions from the experts.

Only 1 in 10 startups ever goes public. And most companies that do go public never amount to much. This sobering reality has two simple -- but frequently overlooked -- implications. One, be aware of the risks. Two, join the company that you believe is most likely to win rather than the one that simply offers the most equity. "For every Netscape there are 20 dogs that are barely barking or are long gone," warns Sparks.

The number of zeros in your stock-option grant means nothing. What really matters is the percentage of the company you own. It's a simple arithmetical point, but one that many people overlook. "I see it time and again with engineers," says Silicon Valley lawyer Mark Radcliffe. "They get caught up in the zeros."

For example, a company Radcliffe represented was eager to land a particular engineer, so it offered him options on 50,000 shares. But the recruit was adamant that he receive 100,000 shares because that's what a colleague recently got from another company. Radcliffe explained that this other company had twice as many shares outstanding, and that his offer was more generous, but the engineer wouldn't budge. So the company, still in its infancy, did a four-for-one stock split and gave the engineer his 100,000 shares. The new recruit was thrilled. Radcliffe was amazed. "He got a smaller percentage than we originally offered!" he says.

Timing is everything. Tim Sparks says the ideal time to negotiate with a young company is 6 to 18 months before it does an initial public offering. At this point, the risks of failure are reduced (although by no means eliminated), and there's still a chance for you to make a score. "A year before the IPO, the stock value is 5% to 10% of what it will be at the public offering," Sparks says. "There's just an automatic ramp-up in the share price. You have more information about the company's viability, and you can still buy in on the cheap."

You're not the only person in the company. So you shouldn't make demands as if you were. "Equity" -- as in fairness -- is a defining issue for all startups. Your individual negotiation is always conducted in the context of what other people are doing. "Let's say a company just hired a vice president of engineering and gave him 1% of the equity," explains Dennis Crow, an executive recruiter and partner at Pierce & Crow of Greenbrae, California. "Then they hired a vice president of marketing and gave her 1% of the equity. You want to be vice president of sales, and you say, 'I want 1.5%.' There's just no way the company can break the mold for you. It would destroy morale."

That means your drive to negotiate for a piece of the action should be tempered by a commitment to your new colleagues and the company as a whole. "You can't go in with a me-against-the-world attitude," says Crow. "You are really negotiating into a family. Remember, whatever you negotiate is public information at the moment of the IPO."