(FORTUNE Magazine) – Gabe Fried is on the rebound. The 31-year-old director of strategy at Epesi Technologies enjoys his new job, but he's just not as emotionally attached to it as he was to his old gig at Toysmart.com. And for good reason: When Disney pulled the plug on Toysmart last May, Fried's 30,000 stock options (which he estimates were at one point worth a couple of hundred thousand dollars) disappeared like Cinderella's coach at midnight. "It's like coming off a bad relationship," Fried sighs.

Fried's not alone. With the Nasdaq down some 50% from its high last March, stock options that were once a boon to recruitment and retention are becoming increasingly worthless, driving people out the door instead of keeping them at their desks. And we're not just talking about dot-coms here. Brian Hall, a compensation expert at Harvard Business School, sampled public companies in all industries and found that 30% of stock options were "out of the money"--that is, priced above the current value of the stock--at the beginning of 2000. And that was before the bears descended on Wall Street. Hall estimates that almost half of all options are underwater now.

Numbers like that could lead job hunters to shun options altogether. Big mistake. "The pre-IPO companies are always a crapshoot, but it's a good time to join a company like Dell that's undervalued but still stable," says Bill Coleman, VP of compensation at Salary.com. "There's nothing to say that options are worth less than they were before," adds Harvard's Hall. "In many ways they're worth more, because we've already had a correction."

So how should you go about evaluating options in today's tumultuous market? James Weiss is trying to sort through the options tangle right now. Weiss, the former president and COO of the defunct Clubcastlive.com, was seduced by options once. Now, as he considers various job offers, he's focused more on securing a healthy salary and a generous bonus plan than on getting another slab of potentially worthless options. In November he turned down an option-heavy offer from a promising Manhattan startup, an opportunity he says he would have jumped at two years ago.

Compensation experts like Salary.com's Coleman say that while options can still have value, they are no substitute for salary. Last April, Michael Patterson nixed a salary offer that was $20,000 higher than the one he settled on at B2B auction site Freemarkets. The stock, which hit $341 last January, now wallows near $17, a full $40 below the exercise price of Patterson's options. "I thought I was getting an incredible value, but the market thinks the floor is a bit lower than I did," he says.

Which brings us to another important point: Do your due diligence on your prospective employer. Regan Senkarik knew little about the car industry and even less about options. But she did know that she wanted to cash in on the dot-com boom, so she took a 40% cut in her salary and bonus to join Autoweb.com just before its much ballyhooed IPO in March 1999. Senkarik now has 100,000 underwater options at strike prices ranging from a couple of bucks to $9. (You can buy a share now with the change stuck in your couch.) "I've learned not to watch the ticker at all," she quips. By contrast, her former colleague Michele Hickford knew when to take the money and run. Hickford cashed out in September 1999 and bought a silver Mercedes CLK 320 with the profits from her options.

If a company is dangling options before you, don't assume the person doing the hiring will tell you everything (or much at all) about the details of the plan. Last year Tim Clancey, who worked for a California bank he'd rather not name, let 500 in-the-money options expire because he didn't know he had to exercise them within 60 days of leaving his job. Embarrassing, especially for a banker.

Another thing a potential employer may not tell you: You can tailor an options program. "The company says it's set in stone, but it doesn't have to be," says Gil G. Silberman, a partner in the emerging-companies practice at Thelen Reid & Priest. "If the employee is desirable enough, the company can bend." So assume you're desirable, and find out the following before signing on.

How many options am I getting?

At pre-IPO companies, don't just look at the number of options you're offered. Check out the total number of shares approved for issue. That will determine the future value of those options.

What happens if the stock tanks?

Rather than accepting a wad of options upon hire, ask your potential employer about receiving fresh, in-the-money grants annually or even quarterly. That way the options adjust to the stock price. The potential payoff's not as great, but there's less downside if the stock sinks.

When can I exercise options?

Most options fully vest within three to five years, but the sooner, the better. A recent study by human resources consulting firm iQuantic found a trend toward shorter, more frequent vesting (monthly rather than annually)--a nice feature if you can get it.

What if the company is sold?

Some stock-option vesting schedules accelerate upon a change in control. Ask about such a clause. And find out how long you're required to hold your shares after an IPO, a merger, or an acquisition.

What about Uncle Sam?

When you exercise nonqualified options--the type most rank-and-file employees receive--you pay income tax on the difference between the exercise price and the stock's market value. By contrast, tax on incentive stock options (ISOs) is deferred until you sell the stock, and then the entire option gain is taxed at the (lower) long-term capital gains rate--if you hold the stock for at least a year after exercise and two years after it's granted. But, ISO holders, beware the dreaded alternative minimum tax, which kicks in if your paper gain upon exercise is large enough.

What happens if I leave?

Remember our banker friend. If you leave, you must exercise vested options quickly, usually within 30 to 90 days, or they're gone forever. "Don't expect human resources to talk about that," says John Blomfield, director of educational initiatives at Oppenheimer Funds. If you're walking away from nonvested options that are in-the-money, you can use that as leverage when you're negotiating a package at a new company. But beware of "clawbacks": Many contracts allow your former employer to take back any options profits if you go to a competitor (kind of like your ex-girlfriend's taking back that Radiohead CD she got you for Christmas).

As in any relationship, it's the little things that count. Computer science graduate student Greg Bronner spent a few years working for a Massachusetts software startup and has had his share of options heartache. What's he looking for in his next job? "More time off." Now there's an option we like.

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