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 November 19, 1999

Role of stock options increasing

Ask any Microsoft millionaire: Stock options can be an exceptional employee benefit.

Of course, ask a downsized employee of Defunct.com, and you’ll get a different answer.

Stock options are becoming an increasingly important part of salary and benefits packages. But their role has changed.

“Several years ago, stock options were more of a benefit as opposed to being a tool,” says Sharon Hunter, president of Management Recruiters of Boulder. “Stock is now usually a factor of trying to recruit or retain employees.”

Companies, especially high-tech start-ups, are offering stock options to employees to compensate for lower salaries. At the senior executive level, compensation packages usually include stock options, assuring that the exec’s income is highly leveraged to the performance of the company. This encourages presidents and vice presidents to consider Wall Street when making operating decisions.

If you’re offered stock options as part of a compensation deal, here are some questions to ask:

( How does the company calculate the value of its stock?

Larry Caine, a benefits consultant and president of Boulder’s Choice Benefit Services, says the only accepted way to calculate the future value of a stock listed today is a formula called Black-Scholes.

“It’s a very long, complicated mathematical formula that takes into account factors like past performance or expected performance,” Caine says. “You almost need an actuary to calculate it.”

Caine says a good stockbroker or financial planner also should have a copy of the Black-Scholes model.

For a private company, ask for a percentage of the value of the company in stock options. That way, you don’t get caught up in trying to figure out whether or not 5,000 shares of non-traded stock is a good deal.

( How long will it be before the stock is fully vested?

This is a key question because many companies use stock options as a retention tool.

“Companies run the risk that someone’s going to take the money and run,” Caine says. “The whole idea (of vesting) is to place golden handcuffs on a valued employee.”

The standard vesting schedule calls for 25 percent of the stock options to be exercizable at the end of the first year, and another 25 percent each following year. Most stocks are fully vested after five years.

( How will the stock perform?

This is where some homework is in order. If the company is public, check out past performance of the stock. Web sites such as www.hoover.com, www.quote.com and www.siliconinvestor.com track stock trends.

Also, see what analysts are predicting for the future of the company. Internet search engines Yahoo and Excite.com both publish analysts’ reports and their buy ratings for a variety of stocks.

If a company’s private, sometimes you’ve got to go with more of a gut feeling rather than with factual information.

“A lot of it is an individual belief in the company and where it’s going to go,” Holland says. “You have to talk to people to find that out.”

There are ways to determine the health of a company, whether it’s private or public.

Look at the history of the company. Is management stable? Have sales increased? Does there appear to be a coherent business plan?

If the company’s a start-up, how is it funded? Is there a clear-cut plan to take the company public, and, if so, when? What do executives estimate the initial offering price of the stock will be?

Check to see if the company is in a strongly identifiable niche, and how difficult its product or service is to copy. The more unique the company, the better its stock is likely to sell.

Determine whether there’s high or low employee turnaround. If turnaround is low, workers may be hanging in there because they’ve got such great stock options.

Know your industry. If you’re in high tech, stock may soar or plummet quickly. If you’re in insurance, banking or another stable but non-sexy industry, stock options may be a small but reliable part of your total compensation.

( What percentage of your base pay are stock options worth?

Ask your potential boss this question, then determine how comfortable you are with the number. If you’re not a gambler or you don’t plan to stick around very long, choose a low figure.

Ask any Microsoft millionaire: Stock options can be an exceptional employee benefit.

Of course, ask a downsized employee of Defunct.com, and you’ll get a different answer.

Stock options are becoming an increasingly important part of salary and benefits packages. But their role has changed.

“Several years ago, stock options were more of a benefit as opposed to being a tool,” says Sharon Hunter, president of Management Recruiters of Boulder. “Stock is now usually a factor of trying to recruit or retain employees.”

Companies, especially high-tech start-ups, are offering stock options to employees to compensate for lower salaries. At the senior executive level, compensation packages…

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