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My company is rolling out a stock options program for employees. We are not yet publically traded but I think an IPO is only a few years away.

I was thinking about making a suggestion to management but I wanted to vet it here first. I’m not sure I have all my facts in order.

I would like to suggest that they allow employees to give up a percentage of pay in exchange for options. I would gladly give up 10% of my pay for options in the company because we've got something big, we're growing very fast, and this type of compensation could benefit both myself and my employer.

Benefit for me would be:

  • I would pay long-term capital gains on those options provided I held them for two years, converted them into stock at least 1 year later, and then sold them off.
  • I think we have a good thing going and I would like to own more of the company and am comfortable with the risk.
  • I would hope that the stock options given would be slightly more than the cash compensation I'm giving up. Perhaps 8% more is fair? So in other words if I gave up $1 in pay I would expect to get the equivalent of $1.08 in stock options. Is that how these things generally work, and what percentage is usually fair?

Benefits for the company:

  • I believe it could be structured in a way where stock dilution would not happen until the option is exercised. So they pay for my time now, with the dilution happening two years down the line.
  • They'd also be able to raise money internally as opposed to outside sources.

I was thinking fair terms of an offering would be:

  • In the event of an acquisition or IPO all options under this program would vest immediately.
  • Valuation on which the options would be based one would be done annually or at the last funding round, whichever happened most recently.
  • These would be qualified stock options so the strike price would match the value of the stock at the time it's granted.

Is this doable from a legal standpoint, and am I wrong on any of the points above?

Also, would the company have to pay any taxes on the options they're giving me instead of my salary (normally I believe they have to pay 7.5% workers comp, I assume they would not pay this on options?)

Any help is much appreciated!

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(I'm assuming this is a publicly traded company, if not, things are somewhat different.)

The objection that management might have that flows out of the fact that the pool of available options is fixed in size for the current year. (Or maybe several years depending on how they structured the compensation plan.) Within that pool they have allocated some to various key individuals and then some to to the ESOP pool. They don't want requests for more options than they planned to issue in that period. Suppose that many people notice that the companies prospects are good and offer to forgo some salary for options. This could easily eat up the whole pool and leave nothing for the rest of the year. If I was management here, I would want to structure it so that I had control over how many options were granted so that everyone eligible got some and the pool lasted until the end of the year.

  • Thank you for your response. We are pre-ipo, but I think we're only a few years away. How would that change things? – newUserNameHere Aug 26 '16 at 22:08
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    Pre IPO is a privately held company. The number of options available is decided on by the current owners and is usually controlled so as not to dilute their percentage of ownership interest. There are a lot fewer rules on option creation there, but the existing investors will want to be very careful to protect their interests. The rules may also be much more complicated on who can buy shares if this ends up being subject to the "accredited investor" rules. – zeta-band Aug 26 '16 at 22:19
  • Seems like you really know what you're talking about. Am I right about the tax implications in the question above. Also, is an 8% premium for employees trading pay for options a fair number or would you suggest a different one? – newUserNameHere Aug 26 '16 at 22:26
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    Tax implications for a privately held company are above my pay grade. And the imputed price for forgone salary is really more of an arm wrestling match than anything else, since the Fair Market Value of a share in a pre IPO company is at best a judgement call. – zeta-band Aug 26 '16 at 22:42

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