Editor’s note: A version of this question originally appeared on Reddit.
I recently got a job offer where they’re offering me 200 shares of stock options that the company says are worth $220,000. Does that make sense? I’ve never heard of a private company with shares that are worth $1,000 each.
First, I’d encourage you to pause reading this article and double-check all of your stock option paperwork. You may want to share your paperwork with a CPA or licensed financial advisor just to be sure you’re interpreting the stock options offer correctly.
In the meantime, I’ll plunge ahead and answer the question as it’s posed. Is it unusual for a private company to issue shares that are valued at $1,000 each? Yes. It’s rare, as companies typically offer employees more shares at lower prices, but it’s not impossible.
When a startup begins offering shares, they get to decide how many shares they’ll issue. Typically, startups will offer millions of shares when they start, and continue to create new shares over time. When it’s time to go public, the company may have tens of millions (or even hundreds of millions) of shares.
However, it’s important to understand that the relative value of a single share depends on the total number of shares in the company. For example:
- Company A has a total of 1 million shares, which are worth $10 each. Company A is worth, on paper, $10 million.
- Company B has a total of 100 million shares, which are worth $1 each. Company B is worth, on paper, $100 million.
As you can see, just because Company A’s shares are worth $10 each doesn’t mean that Company A is worth more than Company B.
It sounds like there is a second, larger question that you’re asking — did the company do a good enough job explaining to you how your stock options work, and how much they’re currently worth?
Here at Secfi, we want to help build a world where employers have the tools and education they need to explain employee stock options in a way that is clear and easy to understand.
Telling an employee that their stock options are worth $220,000 (or worse, that they might be worth $220,000 in the future) needs to come with a lot more information. That way, you can make a better informed decision about whether the compensation offer makes sense.
I’d consider enlisting the help of your recruiter and a licensed financial professional to help review your specific offer.
- Vieje Piauwasdy, Director of Equity Strategy, Secfi
Do you have a question about your stock options? Email us at firstname.lastname@example.org