An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee

I too would like to see a 'bad options contract' or at least highlights of what would make one.

A book that I also find interesting, and give great insights in venture capital, is the book wrote by Chris Dixon, http://amzn.to/uQSXnb. It's only 2,99 and give good and insightful advices for startups and venture capital.

Post-Enron, the government suddenly felt it was really important to have all options be priced by third parties, even tiny three-person private companies, so it’s now a legal requirement that if the Board wants safe harbor from lawsuits, it must get a 409(a) valuation done every 12 months. These usually cost around $8000 and are done by the most unimaginably braindead accountants you can possibly imagine. Their job is to tell you a high price (say, 1/4 of Preferred) and your job, amusingly, is to explain to them why your company is Really On The Brink Of Absolute Annihilation so as to coax them into a 1/6 or so valuation, which then the Board will accept. This process is time and money you cannot afford, but the government mandates it. (source: page 12 under "Pricing")

At the core of this issue was (and still is) how "deferred compensation" can be exploited by executives as golden parachutes. When execs can spread out their compensation over time, the tax treatment of the compensation can be minimized for the execs and maximized for the companies. Before 409a, the reverse was true. Whenever corporate profits are earned they're either re-invested or distributed -- only two ways to handle the money.

Before 409a, golden-parachute-type arrangements taxed execs when amounts were actually (or "constructively") received as income. This tax treatment made it favorable for employers to give deferred compensation as incentive -- lots of it. Makes sense: amass huge liability for work that was never actually done on profits that have not yet been earned. If you're an executive of General Motors, or on the board of any large company, this pre-Enron way was good for the manager getting deferred compensation, but bad for the company. Any future profits go to the executives FIRST (whether or not those execs are even at the company still!), and the short-term performance of the company and manager is what they want to focus on.

There has always been a huge battle between corporate profits and executive compensation. One of the best professors I had in grad school had done his doctoral on golden parachutes, and this is a pretty interesting area. Complicated, but interesting.

Unfortunately, we don't have any laws creating incentives for corps to give profits to the common shareholders (in this case, employees receiving vanilla stock options), just the laws that encourage companies and their (current and former) executives to engage in tug-of-war over the distribution of future profits. When this happens, very little of the value tends to trickle down to Joe Shareholder .

The author gives his email address at the end.

To be eligible for acceleration depends in most cases on your position in the company. If you are higher management or of critical importance for the company because of your talents, you probably have more chances to get accelerated vesting on your stock options.