One job offer has 10x the options of the other, why are they so different?

Welcome to Help Me Heidi!

Hello! My name is Heidi Roizen. I am a venture capitalist, corporate director, and recovering entrepreneur. I also teach entrepreneurship at Stanford.

People ask me a lot of questions on topics associated with startups, entrepreneurship, and venture capital. I’m starting this column because I thought it would be helpful to broadly share my responses. Every other week I’ll answer questions that have actually been asked of me, though I sometimes change them to mask the identity of the person, to make them more generic, or, frankly, just to make them more fun to read.

If you have a question, email me at helpmeheidi@threshold.vc

All answers are solely mine unless otherwise noted, although I preview the answers with Cindy Hess of Fenwick, one of Silicon Valley’s most badass attorneys, to make sure I get the legal stuff right.

I’m kicking off my column with three questions about equity compensation because, well, I get asked about it a lot! Here we go.

One job offer has 10x the options of the other, why are they so different?

Dear Heidi:

I recently graduated from Stanford and have spent the last few months looking for that perfect job. After countless interviews, I’m now fortunate enough to have two offers! So what’s the problem? Both offers are similar in their cash component, but the equity is waaay different. The company I’m less excited about has offered me an option for 20,000 shares and I only have to pay 20 cents a share to exercise them, which seems like a lot of stock for not much money. But the company that tugs my heartstrings only offered a measly 2,000 shares, and they want to charge me $2 per share to exercise! So what do you think, should I go back and ask them for more? I need to make a decision next week, so please, help me Heidi!

-— Weighing my Options, Palo Alto, CA

Dear Weighing,

First of all, congratulations on your recent graduation from Stanford — your parents must be so proud! You are indeed facing a dilemma, but it is not the one you have outlined.

Luckily, your problem does not need a fancy Stanford degree to solve — you just need to dust off your old 7th-grade algebra because, in order to truly weigh your options, you need to do some pretty basic math. But guess what, you’ve got a different problem — a big missing variable, without which those numbers are meaningless.

In fact, 20,000 shares at 20 cents a share and 2,000 shares at $2 a share could literally be the exact same offer!

How could that be true?

Here’s how: A share is a fraction of the total company. But what fraction of the company that share represents is an arbitrary number authorized by the board of directors. A company could have a total of a million shares, ten million shares, a hundred million shares… you get the picture. And in fact, this number can change, and often does, as a company grows (I will handle this topic in another answer shortly.) But for now, let’s consider your two offers ‘as is’ in terms of how many shares each company’s board has authorized.

Let’s say your dream company has a million “fully diluted shares,” which means the total outstanding shares plus the full option pool. Therefore, your 2,000 share option represents .2% of the company, and to exercise it you would pay 2000 x $2, or $4,000. So, it costs you $4,000 (and four years of work, but we’ll talk about vesting some other time) to own .2% of the company.

Now, let’s say the other company has 10 million shares authorized. Your 20,000 shares would, therefore, represent .2% of the company, and to exercise that option you would pay 20,000 x 20c, or $4,000. So, again, it would cost you $4,000 to own .2% of the company.

In other words, these are identical offers!

Now, in order to arrive at an estimate of what these options would be worth in the future, you’d have to know more data, for example, the preferred overhang, the additional dilution that will happen between now and the exit(I touch on these topics further in the next questions) and the ultimate exit value of the company — which is anyone’s guess!

But to answer the big question to enable a comparison of the two offers as of today, you just need the missing variable, total fully diluted shares.

One final point of advice — the option packages don’t matter anywhere near as much as some other considerations when choosing where to go.

If you want my real advice on which to choose, pick a company where you can work with smart people you like, trust, and can learn something from. Take a job that you are excited to do every day, and preferably go with the company that is growing so you can move up in the organization as new opportunities emerge.

Good luck!

— Heidi