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Entrepreneur - Silicon Valley

Odds of Hanging On

Very good. Once you're in, you're kinda just "in." And it is an "in crowd"—for good reason. Most new companies require special skills, which develop only within that company. Think about early social networking companies—Myspace, LinkedIn, Facebook, and a few others. In 2008, there were maybe 100 execs in the WORLD who really understood that space. And 100 is generous. Conversely, think how many lawyers there are who understand real estate law. Lots and lots. And lots. So a lawyer can be fired and replaced in five minutes with a competitor. But in a new and quickly growing space, the knowledgeable talent just doesn't exist. So unless you break into the office at night and urinate on your boss' keyboard, you're likely not to be fired. Maybe not even then. We wouldn't test it though.

The other thing to think about in this flavor of start-up world is "vesting." Most employees in start-ups are given stock options. The options usually are vastly the most valuable financial part of their job. They can end up being thousands of times more valuable than their salary. But options are given in 4-year buckets—that is, a typical "cliff style" deal for an employee stock option grant operates so that the employer has a year to decide whether or not the employee is a "keeper." The employer then hits a "cliff"—the first year anniversary comes and the employer is then liable for ¼ of the total options that the employee would be owed. The employee then "vests" into more stock options at the rate of 1/48 of the total grant each month.

Example: Apollo wants to hire a head of business development. The job commands 1% of the company in stock options. The company has 10 million shares outstanding at the moment—using advanced math, we can calculate that 1% is 100,000 options. The options are "priced cheaply"—that is, they have a low strike price—but you don't have to worry about that part for now. Just think of them as shares.

So the head of biz dev (business development, to the layman) starts and one year later has "vested" into 25,000 options. At that point, he owns the options. The employer can't take them away. He's "bought them" with his time or "sweat equity." Then each month, that wily head of biz dev vests into about 2,000 more options until his 48 months of employment have passed, at which time he will have fully vested into his original grant. Often employers will do refresh grants 2/3 of the way through an option contract just to be sure key employees stay on board and are…happy.

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