If, like millions of Americans, you work for a startup or in the tech industry, you were probably offered an option or restricted stock unit (RSU) grant when you received your offer. employment.
Kyle Holm is vice president of total compensation consulting at Sequoia Consulting Group, which works with clients on the design of their compensation programs. He said in the technology and life sciences sectors, offering an option grant is a very common scenario.
“For a new hire, that’s probably 90% practice,” he said. ”Equity is an important part of a company’s overall rewards package these days. ”
But what exactly are these benefits worth in shares?
For companies that are already publicly traded and selling shares to the public, it is easier to understand their value. But for a company that has yet to undertake an initial public offering (IPO), determining the value of equity benefits is “more art than science,” said Gianna Driver, chief human resources officer at Exabeam.
“You have to take a bit of a leap of faith,” she said. “Public companies, you know what that value is because that’s what it’s being bought and sold for right now in the open market. With a non-public company, it is hypothetical. Technically on paper today, it’s worth nothing.
“When you receive stocks instead of cash, there’s more risk, but there’s also more upside.”
– Daniel Lee, Director of Financial Planning at BrightPlan
For startups that can’t afford to pay new hires competitive salaries, it’s common to offer new hires stock benefits instead of more cash. In the best-case scenario, the company does very well, its value increases and its share price soars. You make a generous profit when you choose to sell your stake because your strike price – or the set price at which you can buy the stock – is less than the market value of what your stock options are worth .
In the long run, getting equity in a business can be a higher risk, but it’s also a higher reward.
“WWhen you get stocks instead of cash, there’s more risk, but there’s also more upside,” said Daniel Lee, director of financial planning at BrightPlan and personal finance instructor at the University of California, Berkeley Extension, who teaches students about equity compensation. “When I’ve worked with some of the instant millionaires who have come out of IPOs, it’s 99.9% a result of their equity, not their cash compensation.”
But how do you know what’s a good deal or a red flag when a recruiter or hiring manager tells you about their company’s equity benefits? Here are some key questions to ask yourself and hiring managers before accepting a compensation package with stock options.
1. Are they RSUs or stock options?
First, it is important to understand what kind of stock market advantages you have. A big difference is whether you are offered stock options or restricted stock units (RSUs).
If you join a company after it goes public, you likely get RSUs, which are the most common type of stock award. A 2018 investigation of 150 publicly traded technology companies found that 99% of companies granted time-based RSUs to employees.
A stock option is the option to buy shares of your company at a certain price set in the future. Conversely, you don’t have to spend your own money to earn an RSU: your company sets you a vesting schedule – predetermined intervals at which your RSUs become available to you – and assigns a fair market value once your RSUs are acquired. . This is why RSUs are considered less risky than private company options; once your RSUs vest, they belong to you, whereas with a stock option, you have to buy the option, Lee said.
“They [RSUs] are almost always worth something,” Lee said.
With RSUs, “it’s the same as getting a bonus at the end of a year, but instead of giving you money, they’re going to give you shares of the company. And they usually vest over four years, so you get a quarter after a year and then you can get a portion every quarter,” he explained.
2. Is the salary increase or offer less than your market value?
You don’t want to sacrifice too much of your salary for stock benefits.
Ask yourself, “Can I live without this money?” said Ramona Ortega, founder of my money my future which strives to bring financial education to underserved communities. “You don’t want to take stock options if you’re not getting a base salary that will cover your necessary expenses,” Ortega said.
She said you should always try to get the market rate of your salary unless you are independently wealthy or really believe in the business and are willing to take the risk.
“The worst case scenario is that you take too many risks,” Lee said. He gave an example where a person goes into debt to cover his cost of living, because his cash salary is not enough to cover basic necessities like rent. In this situation, “you just hope and pray that all those stock options you got will be worth billions of dollars, but most companies don’t go public… Statistically, your options won’t be worth anything.”
Holm said it’s important for employees to understand the long odds of getting cash with stock options.
“It’s really far – no matter what company it is – that you will actually see cash. Maybe 1% of companies go public, if that’s the case, especially in the current environment. We just don’t see a wide-open IPO window,” he said. “Most employees are likely to find cash more attractive, especially with the stock markets they are in.”
3. How long do you plan to stay with this company?
Thinking about whether you see a future with this company is key to deciding if an employer’s equity benefits are worth it in the long run.
Stock options and PSUs generally vest over several years. Often there is what is called a one year delay cliff waiting period, where you must stay with the company for at least one year before receiving benefits.
“Let’s say I hired you,” Ortega pointed out as an example. “You’re going to get 200,000 options over four years. But you won’t get the first drop until a year later. You have to stay with the company for a year before you even get anything. It’s the cliff.
You must generally exercise your options within 90 days of leaving the company. As you assess the timeframe, you also want to consider whether you could raise enough money in time to buy those options before they expire if you quit or get fired, Ortega said.
And while the stock rewards are amazing, you won’t stick around long enough to enjoy them if you’re driven away by a toxic work environment.
“There’s a saying in HR that people don’t quit their jobs, they quit their managers,” Driver said. “Yeah, you can give people money, you can give people equity, and all of that is great and wonderful. But at the end of the day, the job has to be fulfilling for the employee…That matters a lot.
4. What is the stock worth today and what do employees and investors think it will be worth in the future?
Once you receive a job offer with equity benefits, you have every right to ask more questions about it.
If it is a private company, you should ask to see its 409A Assessmentwhich is an independent valuation of the organization’s actions that determines fair market value by analyzing financial statements, assets, and cash flows.
“It’s the last value of every share in their company,” Lee said, noting that each time the company raises funds, it receives a new valuation. “If they say they’re going to give you 10,000 options, you don’t know what that’s worth unless you know the stock price.”
Lee estimates that more than half of employers would give you that 409A rating if you asked, and if they don’t want to disclose, you should consider that a red flag.
“Where do you see the stock going ahead of its IPO?” is another good question to ask recruiters, Lee recommended. “At least you’ll understand what the founder’s or company’s mindset is about where they’d like to see the stock go,” he said. “They might say, ‘Stocks are worth five dollars today, but we’re aiming for stocks at forty dollars when we go public. “”
Ask how many shares outstanding there are to find out how many shares investors, employees and managers currently own. That can determine how big a slice of the pie you have, Holm said.
“You can give me a certain number of shares, but without the context of the number of shares outstanding, I don’t really know what that means,” he said.
Of course, you can also do your own research online to determine the industry status of your business. Look at the type of shares people with similar jobs and titles get List of angels. You can also go to Blinda forum where professionals can share their compensation plans anonymously, to compare what your peers are getting, but as with most review sites where it’s hard to verify claims, you have to take what they say with a grain of salt grain of salt.
“It’s up to the contestants to do their homework and be diligent in really understanding, ‘OK, what kind of media and news coverage is it coming out?'”
– Gianna Driver, Human Resources Director at Exabeam
Driver recommends job applicants check out similar companies that have gone public within the last six months or year.
“It’s up to the contestants to do their homework and be diligent in really understanding, ‘OK, what kind of media and news coverage is coming out?'” she said. “Is this space that this potential business is playing in, is it a safe space? Is it going to grow or is it a legacy that is going to become redundant over time? What are the multiple [in stock value] from other companies? Do I believe in this management team? … A lot of companies have great products, but they don’t have the right leadership to make it happen.“
Know that once you work within the company, you’ll have a better sense of the organization’s true value, for better or for worse, Ortega said.
“If they’re out there raising money and saying they’ve got the coolest new gadget and they’re getting users, and you know inside that it’s a shitshow… At At this point it’s just a matter of [thinking]”Well, I don’t know if I really believe in it,” she said.