I am trying to understand the difference between owning stock options in a small start-up and being part-owner in the start-up. thx... apologies for the deletes...

First, any estimate of the value of either position is subject to order-of-magnitude errors. Either alternative may have an expected value more than 10X greater or less then 1/10 smaller thatn what you calculate (with a high chance of 100X to 1/100X errors). The further the company is from stable profitability and the earlier it is in the growth curve, the worse the estimation error. My point is that unless the expected value of one alternative is more than 10x greater than the other, the chance of one alternative being financially better is nearly 50%.Second, unless the company goes public, your shares will be illiquid. Cashing out will include a challenging process of you negotiating (not calculating) the value of the shares with them and finding someone else to buy them. Note that in this regard, shares have more value because you can take them when you level the company and hold the shares until a better offer or exit opportunity arises.Third, if your "part-ownership" is significant (e.g., >10%) and/or you are part of the top management team, then you may be expected to input capital or agree to be liable for the company's debts. Investors/lenders like to ensure that the managing owners have skin in the game.Fourth, your choice will have tax implications depending on structure of the company. In the U.S., if the company is a pass through entity (partnership, LLC, or S-corp), then the profits are distributed directly to the share owners (but not option holders) and taxed (whether the company gives you these profits in cash is a different issue).Finally, this is a long-term play. especially if you choose options. Regardless of the merits of the two deals, you need to be convinced that you want to stay for at least 5 years to reap much/any benefits. Differences in your level of interest in the job or feelings toward the people of the company may cause you to exit prematurely (before the options are vested or the shares appreciate). Point: unless there's a huge difference in the expected values of the alternatives, I'd go with the company you "like" the most. If you like both equally and strongly (and the part-ownership fraction is large), then pick the options. If you aren't sure you will stay a long time, then pick shares.Good luck!

Besides Traden4Alpha's excellent points: if you really want to be an owner of this venture and not a holder of illiquid options on illiquid stock, then --(i) offer to contribute capital (not just your labor) to become an owner, and (ii) get a lawyer and carefully review the buy/sell agreement among the owners that you will join.In the alternative, my advice is to personally value the options grant at zero, and then see if you wantthe position anyway.regards,

Yes...There are lawyers (very few indeed) called derivatives lawyers.PhD in Quant Finance & JD.M

thx

thx.

Thanks again on the icon. Regarding ownership details, in my opinion, they should absolutely tell you who all the owners are (and their percentages).But, if I were an owner, I wouldn't share any buy/sell agreements with you unless you were going to be one of parties to the agreement.The fact that you don't already know the basic ownership details at this stage suggests that you don't have the "big picture" about this start-up. You have lots of homework to do. Before even -thinking- about negotiating anything, find out: How are they raising capital?/are they planning to become a public company?/do they have a venture firm part owner now?/have they shopped for one?/a zillion more questions here. You need to learn all this stuff and use it to form an opinion about this venture -before- focusing on your own agreement.

Some thoughts:1) Make sure you understand the voting rights of the stock. This often doesn't work like people think it does. In other words there are systems (in the corporate charter) where your shares are counted in one way or another. These ways are often organised to favor one sort of stock holder over another...in other words, the voting system may favor groups of small holders (more weight per share) or big holders. What do you get with your votes? The right to elect board members. What if they don't favor you after they're elected? How hard is it to oust them?2) Regarding the options, and I suppose this goes for the stock as well, one typical trick is the dilutive offering, after you've had a great quarter or year. A corporate charter usually requires the company to make sure you have a proportional share of a new offering that is guaranteed to you, the current shareholder. This seems great, until you realize you are tapped out and can't afford to purchase more, so your holdings get diluted. They do this on purpose. This is great reason to be wary of options in general; you will need to exercise in order to force your hand.Realize that you have a high probability of being rear-ended on this one way or another. Be careful out there...

Papercut's warning should be heeded. Cabals of company controllers can use all manner of trickery to dilute and marginalize certain shareholders. That said, you can always leave. If the intent of the options/shares is to motivate your hiring and commitment to the firm, then the other owners have some incentive not to screw people too badly. To the extent that you feel aligned with the other owners, your chances of getting the short-end of the stick are diminished.Perhaps the way to look at this is that both options and stock represent an extremely speculative, illiquid investment (high return, high risk, high skew, high kurtosis). The distribution of returns for early-round investors has massive tails with an expected compound ROI that will run a healthy 20-30% per year. That means two things. First: don't count on the stock or options ever being worth anything. Probably between 50%-80% of the early-stage shares will lose most or all of their value. Second, don't underestimate the value of the shares because you shouldn't be surprised if the shares are worth a lot. Early stage investments can yield 2X-100X its original nominal value. Be careful (but don't be too timid).

QuoteOriginally posted by: zer0snrThe thing is that I see a tremendous amount of the initial work falling in my lap, which will be of tremendous use to the company. So, invariably, the thought is what happens after the first year or so; if I'm a share holder, what sort of company restructuring could put me at a dis-advantage etc. crosses my mind.This statement from you makes me think that you should apply the "When there is doubt, there is no doubt" rule. If your prospective employers have two brain cells to rub together, they will realize that the situation they have offered you leaves you with quite a few legitimate concerns, and yet they have left you to go out onto this internet forum to have them addressed rather than seeking on their own to cover them. This is not, I can assure you, how executive compensation negotiations work with established, honorable firms. Maybe your prospective employers just don't have clue one about how to handle key employees, but I suspect that they might be planning on screwing you, one way or another -- how stupid would they have to be to leave you with all these doubts if they don't have to? The fact that you were given the impression that you'd be part of the ownership, but then they backed out on that, smells wrong, too. And anyway, if they really are that stupid about handling key employees, who knows what other critical aspects of the business they suck at.I very strongly advise that you get your money up front, either in cash or with a guaranteed portion of the ownership. If they won't do this for you, given that you expect to be doing a lot of the initial work, you probably should politely thank them and walk away. If I were you, I would even go so far as to ask them to give you whatever contract they offer in electronic format, so you can modify it and take out all of the weasel-ish sounding clauses and insist on an full explanation if they want any of them restored. And, obviously, anything you don't get in writing, forget about it.If you have something worthwhile to sell, eventually you'll find someone willing to pay a fair price for it. This potential employer might not be they.

thx.