What are the pros, cons and alternatives to NQSOs?
February 28, 2006
Subject: To NQSO or not to NQSO
Date: Thu, 02 Feb 2006
Hello Michael. Your FAQs are very helpful indeed.
I live and work in California providing technical recruiting services for a California-based, pre-IPO company. I want to explore receiving part of my compensation as NQSOs instead of cash. I am an independent contractor, paid on an hourly basis. Can you explain the pros and cons, and what other alternatives I might have?
Date: Wed, 08 Feb 2006
The advantage of receiving an option is you have no out-of-pocket risk until you exercise the option.
The disadvantage is you have little control over whether you will benefit from the arrangement. The company might never go public, and you might never be able to sell the shares.
With changes in the tax laws and financial reporting rules, issuing employee stock options is becoming more and more expensive, making them less attractive for start up companies.
I am favoring outright stock grants and stock sales to employees by start up companies over options in the current environment. Completed transfers reduce the uncertainty of the results of the transaction and the requirement for ongoing accounting recalculations. The employee has to be willing to accept more risk, but the income and cash exposure aren’t too great.