You May Never Be Able To Grab The Carrot

If you are enticed to become “a stakeholder” in a company or startup by having the stock options or warrants carrot dangled in front of you as an incentive, my own “stock options and warrants” tales of woe are a flip-side you need to hear. Especially since you’ll hear A LOT of the “You’re gonna GET RICH” from those trying to hire you or colleagues naive enough to think stock values go up automatically.

TALE #1: STOCK OPTIONS
In December of 1999 I accepted a job at Vignette, at the time the fastest growing software company in history. With the initial shares I received, and the ones I’d be granted and earn-out over four years, I began to consider the realistic possibility that I’d enjoy an options gain of $5-6M over that four year vesting period.

You know about the “dotcom” crash in March of 2000, right? I sure do because Vignette never recovered and the stock (and my initial options) tanked. Though subsequent option grants were adjusted downward, those ended up in value too. It’s been said that “you can make a lot of money on the way up and the way down” if you hang in there with a downtrending company and I did, but that money was NOT made on stock options. When I left in 2003 with thousands of fully vested shares…they all were so far ‘underwater’ that all were worthless.

Don’t think “Oh poor Stevie…he missed out on being rich” since I’ve done all right over the years and have a wonderful family, friends, my health and (hopefully, if the economy holds) a solid retirement portfolio. Plus, my Vignette experience was a remarkably good one. I worked with lots of great people, met and hung out with a handful of executive-level customers, most of whom I’m still in touch with to this day. Went on club trips (my wife and I took our kids with us to Maui to the Four Seasons) and learned a lot playing the enterprise game at that level.

Sure would have been nice to make millions though, heh? Yes, but after a stint running strategic alliances at Lawson Software (now part of Infor), I ended up going off on my own to perform management consulting and had an opportunity with startups and young companies that gained me tens of thousands of stock warrants…ones that would surely make me rich. Or so I hoped. 

TALE #2: WARRANTS
As part of that consulting adventure over several years, I ended up working with seven startups strategizing over sales, marketing, partnerships and alliances, and whatever else was needed. I received warrants vs. options for tax reasons (here is an article about the difference between the two) and was excited to receive partial compensation in warrants in those seven deals. As such my incentives were closely aligned with the overall success of the startup and I’ve always believed aligning incentives was an imperative so everyone was in front of the cart pulling forward (vs. some sitting in the cart enjoying the view and contributing little!).

I won’t embarrass anyone by revealing the names of the companies that didn’t make it or their founders or investors (plus I always keep this stuff confidential anyway). Suffice to say none of them panned out for a variety of reasons: The startup’s technology wasn’t adopted by the market; investors didn’t come through; competition was too steep; one founder fell deathly ill and was the brain trust; and so on.

Each time I thought, “Hmm….maybe this is the one?” but it never happened. Each time I had warrant grants that looked like a sure-thing, especially with a few of those startups whose founders were successful serial entrepreneurs, and had sold companies several times over, but these new ventures didn’t pan out. Good thing I’m not done yet, especially since the old rule-of-thumb about investing is “only one out of ten deals works” so I guess I’ve got three left.

The options or warrant carrot dangling in front of you may be one you’ll never catch.

WHAT DOES THIS HAVE TO DO WITH YOU?
I’ve been finding that many, many more startups (and established companies too) are doling out stock options in lieu of monetary compensation. They’re doing it with engineers (“You’re a part owner!” is the refrain) and with many other positions as well. They’re also offering vendors stock warrants (like management consultants, lawyers, accountants, web developers, etc.) in lieu of cash payments since they usually don’t have alot of cash.

You still might be resisting this because you believe that I’ve just got bad luck and that we’ve all heard the stories about people like the Google masseuse who became a millionaire through stock options. But let me tell you that there are thousands of tales of woe like mine for every one like that masseuse’s.

If you do take options or warrants—and negotiate a reasonable split between them and cash compensation—please don’t spend them in advance. Don’t, for example, go buy a new or bigger house like a colleague of mine did at Vignette in the early 2000s: She bought a multi-million dollar spread because she absolutely believed the options would go up and make her rich, but instead they (and the entire dotcom market) tanked, she’d borrowed against them, and ended up with nothing and has a tax bill she’ll probably never be able to repay in this lifetime.

When, or if, you’re presented with either stock option grants or part of your compensation as warrants, just don’t automatically assume that you’re going to make a ton of money. Some do, but most don’t.