This is an anonymous post from an Elpha member.

I am a contractor, and my company is planning to IPO. Other than trying for a FT, how do I strategically take advantage of the situation for possible stock options??

Marhta61·Sep 21, 2021

Posted in:Advice Compensation Startups Tech

Hi ladies,

I'm at a lost and could use help from you all! I am in the middle of re-negotiating my contract at my current start-up, and they've decided to extend it until end of March.

Two questions I have about it:

1. Is it possible that they've strategically timed the contract for the duration of renewal because they have an IPO date in mind? So even IF they decide to convert me to FT, I won't be eligible for stock options?

2. If yes to the above, is it worth it for me to negotiate for a shorter contract window? What are actions I can take to put myself in the most ideal situation to take advantage of stock options? I don't know the IPO date.

Unsure of how all of this works, would love to hear form those who have been in similar situations!

Thank you ladies!

teresaman·Sep 22, 2021

Throwing out a thought: could you renew your contract but ask for stocks instead of cash?

Marhta61·Sep 22, 2021

Hi Teresa!The company has not yet IPO’d so it’s unlikely to be an option, but thank you so much for your input!

Angelicaparente·Sep 22, 2021

Companies can give out stock at any point. They don’t need to IPO first…

Angelicaparente·Sep 22, 2021

For example, even pre-IPO it’s common for employees to get their initial stock grant when they’re hired but then additional stock grants as they’re given bonuses, promoted, or sometimes when the company goes through a dilution event (so that the employees are given additional stock to cover some of the dilution).

teresaman·Sep 22, 2021

Exactly, +1 to @Angelicaparente's points! And apologies on my misuse of the term, I should have said options instead of just stocks, I didn't mean stock shares :)

sophiablistein·Sep 22, 2021

Hi Marhta, options usually have to vest for a year anyway, so if the IPO is going to be in the next year then options wouldn't do you much good. You could try negotiating for extra compensation in your contract, though legal assistance would help here if you can invest in it. E.g. you could negotiate for a cash bonus if there's a liquidity event like an IPO. You could also try asking for an options grant that's backdated to when you started working with the company (assuming that's far enough back that the grant would be past the cliff when the IPO happens), but if they're already in the process of exploring an IPO then that may not be possible (once they start exploring an IPO, the company valuation becomes invalid and options can't be granted).

Marhta61·Oct 01, 2021

Thank you so much for your knowledge! I didn’t end up negotiating for cash bonus, but I did ask for a raise, which suffices for now

Angelicaparente·Sep 22, 2021

It might be a hard sell, they might be trying to keep you as a contractor to avoid giving out more stock especially before an IPO. You could definitely try negotiating this as others have mentioned. Do they tend to keep most people on contract? What about new hires? That could be a sign they are hesitant about stock grants.Another thing to note is that if they already have an IPO date, you’d likely be getting ISOs that are based on their current valuation which could be closer to the IPO price vs. earlier employees that got stock valued at earlier stage valuations. Not only would you need to vest for a year, but your strike price may be relatively high and you’d have to take into account the reverse stock split as well when it comes to valuing those pre-IPO shares (it can be very hard to predict what that reverse split multiplier would be, too). You could negotiate for RSUs but some companies don’t give out RSUs, and they have different tax implications. Of course there are also tax considerations, qualifying and non-qualifying dispositions, AMT, etc. Equity can be incredibly worthwhile, but complicated from a financial perspective and difficult to value pre-IPO. There are cases where you will have to spend money before you can make money depending on your stock hold/sell strategy (exercise costs, AMT, long term/short term capital gains, etc). If you’re a contractor they may not have told you what their current valuation + shares outstanding is, which also makes it hard to know how what stock value to negotiate for and if that would be more/less valuable than something like a bonus like someone above mentioned. It comes down to knowing what your levers are. If the company wants to avoid giving out more stock, negotiating a bonus or higher rate sounds like a a good strategy.

Angelicaparente·Sep 22, 2021

And of course also worth looking at competitors and what stage their at in determining what the Stock value would be. But it’s really easy to be off by a factor of 10 in these calculations (because so much goes into them), so determine how much risk YOURE willing to take and put min/max bounds on what your upside would be ***including taxes***.

Marhta61·Oct 01, 2021

Thank you so much for all the information! I decided to just negotiate for a higher pay. There were too many factors that came into play, and not knowing the IPO date made it difficult. But thank you for the education! This is my first tech company so I’m not 100% familiar with how it all works, but glad to have the support!

DianePrince·Sep 25, 2021

Not knowing all of the details, it sounds like you're technically an employee and not actually a 1099. Contractor vs. w2 employee status is based on federal and state law -- not on what a company wishes to classify you as. If you educate yourself on that. you'll likely have a lot more leverage in your negotiations.