Dec 28 2007 by Brad

Can Employee #1000 Get Rich Off of Stock Options?

Q: You’ve discussed the "typical" equity allotments for founders and senior management. But my question is about the perceived and real value (I presume they differ considerably in many cases) of stock options for employees beyond the first few dozen.  Do you have any historical perspective on whether options grants really drive wealth creation for any hires outside of early founders? Does "Employee #100" ever get rich off options? Does "Employee #1000"? At what point do stock options really cease being a major selling point for recruiting startup talent?

A: (Brad): While you have to define "rich", I’ll use millionaire as a proxy.  There are many examples of companies where the 100th employee made over $1m from stock options.  There are less examples of companies where the 1000th employee made over $1m, but there are plenty (Microsoft, Google, eBay, and Yahoo immediately come to mind.)

A successful company that manages its capital structure can always use stock options (or restricted stock) as a motivator.  The variance of outcomes decreases as the company gets bigger (e.g. it’s much easier to make a fortune as an earlier employee – but it’s also much easier to make $0 when the company fails) but in success cases the numbers can still be pretty large.

That said, if the valuation of a company gets ahead of itself at an early stage, stock options – especially in our new and exciting world of the 409a regulations – could end up having a lot less value because the strike price would be set unnecessarily high.