How to get the best employee stock options when negotiating your contract

Everything you need to know


How to get the best employee stock options when negotiating your contract
.cult
Story by

.cult

.cult by Honeypot is a Berlin-based community platform for developers. We write about all things career-related, make original documentaries .cult by Honeypot is a Berlin-based community platform for developers. We write about all things career-related, make original documentaries and share heaps of other untold developer stories from around the world.

This article was originally published on .cult by Mikaella C. .cult is a Berlin-based community platform for developers. We write about all things career-related, make original documentaries, and share heaps of other untold developer stories from around the world.

Receiving a salary package that includes shares can be a flattering indication of a company’s desire to work with you or fill you with exciting dreams of the future where you have a chunk of equity in the next big thing.

But it can also be confusing, particularly when you try to understand how your shares change your salary package over the long-term. Are they basically a guarantee for fistfuls of cash to come? On the other hand, do they make it harder to argue your way into a pay bump? Should you be expecting more shares with every new promotion?

Stick with us and we’ll break down some of the important things you should keep in mind when you receive a salary offer that includes shares… so that you can go back and negotiate the best package for you!

1. Shares are (almost always) a gamble

If you’ve been offered a role at a public startup, you can look up how much the shares they’ve offered are worth, how they’ve performed over the last few years and make a quick and fairly certain calculation for how much the shares will be worth once they’ve vested. (More on vesting later.)

Barring a stock market crash or unforeseen catastrophe (which you should of course be aware is always a possibility!), this will give you a pretty reliable estimation of the shares’ exact monetary value.

But most startups, and especially early-stage startups, will not be able to give you this information. Unless you’ve got a CEO with an extremely accurate crystal ball, even the leadership team has no idea if they’re sitting on a goldmine… or a mudpie.

The shares could skyrocket one day — maybe you’re working for the next Apple! But it’s much more likely that the shares will never be worth much at all.

This is why the most important aspect of evaluating your salary package that includes shares is making sure you’re happy with the rest of the package. You can’t count on your shares to earn you lots of money, and you can also never entirely predict when or if they’re going to start paying out. So don’t hang your hat on a hope: the salary is your actual guaranteed income. See shares as a happy bonus which will be a great surprise in the future… if they actually pan out.

2. Like any gamble, they take a while to pay off

A company doesn’t want you to cheerfully accept your shares, work for a week, sell them off, and then move on. That means that most of the time, instead of receiving equity directly, the startup that wants to hire you will propose a structure where you earn equity in the future. There are many different kinds of equity structures across different startups and countries and they all have different legal and tax considerations, but what typically stays the same is that you earn equity on a vesting schedule.

Vesting is what we call the process that guides the way you “earn” (or gain rights to) your equity. Sometimes vesting happens on a regular schedule (i.e. monthly) or it might be tied to performance milestones. It also usually includes a cliff, which is the minimum length of time you have to wait before the equity “vests” and becomes yours.

For example, one common setup is “monthly vesting over four years with a one-year cliff.” This means that you’ll earn 1/48th of your equity compensation every month for four years, but you don’t actually earn anything until the end of your first year, at which point you receive 25% of your equity all at once. If you leave the startup before your vesting schedule is done, you’ll usually lose any unearned equity compensation, and if you leave before the cliff (i.e. after nine months), you’ll lose all of your equity.

That’s why it’s important to see shares as a long-term investment. If you’re planning on leaving the startup before the end of your vesting period — and especially before the cliff — it’s unlikely that you’ll see the full benefit of your equity, even if it does come to fruition.

3. Will my shares affect my future raises?

Most experts agree that equity should be seen more like a (signing) bonus rather than a “raise” or “base salary.” As a result, your shares should not affect any future raises any more than any other type of bonus would.

If you have, say, a hypothetical potential €20,000 worth of shares it should not be added to your base salary. Your €90k salary is €90k, with or without any shares, and that’s the amount you should be talking about during a salary negotiation.

If a startup does try to argue that your shares are included in your base salary, you could calmly respond that you could have received the same bonus from a bigger firm, but you chose to take a chance on the startup instead. As such, your equity should be seen as a compact and promise of trust between you and your company, and they can continue to maintain your trust by raising your compensation to market rates regardless of your equity’s value.

Having said that, it can be worth taking your shares into account in a salary negotiation, the same way you would any kind of bonus. Sometimes receiving a bonus is a great way to push for a raise: if you’ve been given a bit extra in acknowledgment for your hard work, you could wait a month or two before you go to your company and say,

I really appreciate the bonus in recognition for my work in March. Actually, I feel like I’m working to that standard and capacity at all times, and as such, I’d like to talk about the possibility of a raise that reflects my success in this role.

On the other hand, sometimes a bonus is a way of acknowledging a good job as well as the company’s inability to give you a raise right now, whether because of their financial situation, raise cycles, seasonal evaluations, and more.

You’ll have to follow your common sense to decide if having been recently given shares is a way of gently confirming your importance to the company within a fixed cycle, and you should wait another few months or until a professional milestone (like a year in the role) before you ask for a raise.

4. Should I get more shares as I rise in the company?

If you enjoy and are motivated by the shares you hold in your startup, that’s great! And there’s certainly room to negotiate for more equity as you progress in your company.

Indeed, if you grow to be part of the leadership team, you might very well want more stake in the startup. A startup will also usually be pleased to hear your interest in having more shares — it shows your motivation and belief in the company — so you don’t need to worry this is a request that would go down badly. However, you should be aware that timing is an important consideration for receiving more equity.

“Equity is generally designed to help retain and motivate employees with a set vesting schedule,” Travis Biziorek, CEO of Kibin.com explains.

If after six months at the company I offered you more equity on the same vesting schedule, you will vest all of your equity four years from now or 4.5 years from the date you started.

The problem here from an employer perspective is that I’m giving you a lot of value for very little added retention and motivation. Chances are you’re already sufficiently motivated and the added equity (while expensive to me) won’t get me much more in terms of motivation and may or may not get me anymore in terms of retention.

As such, Biziorek says that he’d rather reevaluate your equity at the two-year mark in your time at the company. That increases the likelihood that you’ll stay on after your initial four-year vesting cycle for long enough that it’s worth the cost to the company in equity.

5. So are my shares worth it?

This is something only you can decide.

Avy Faingezicht, engineering manager at Vouch Insurance, says,

Evaluating any financial project requires accounting for the time value of money. The payment schedule for most startups is asymmetrical: You’re accepting less compensation today for the promise of a potential payout later.

In short, the problem we’re solving is that $1 today is worth more than $1 tomorrow. With $1 today, you can pay off $1 of debt, and avoid accruing interest on it; or you can put it in the bank and earn that interest yourself.

Accepting shares and giving them a lot of weight in your financial planning is, as we’ve already said, a gamble. It’s a gamble that certainly pays off for some people: for example, VCs make lots of these gambles with their funds.

But precisely because they can make lots of gambles, it means they can be wrong most of the time and then hit it big just often enough to keep making a profit. You, on the other hand, are putting all your eggs in one basket, and there is a very real possibility that your equity will be worth exactly zero dollars.

But of course, your shares might pay off. Even if you’re not suddenly a multi-millionaire, they might result in several thousand dollars – a fun bonus to reward your years of hard work. Or they might give you a greater sense of motivation, investment and camaraderie with your company. Or they might pay for a nice birthday present for your mum.

All of these possibilities are worth consideration, but only when weighed alongside an offer that is attractive in other ways. When you evaluate your salary package, make sure you are putting the most weight on the actual money you’ll bring home at the end of the day. You could also consider other motivations which won’t make any impact on your financial situation but will probably affect your satisfaction at work more than your equity – motivations like: Will you enjoy the work? Will it provide a boost to your career? Will you be working closely with the leadership team? Will you meet the right people?

And finally, never be afraid to seek out a financial adviser. If you’re ever considering making a big investment or taking a dip in your salary to prioritise equity, it’s probably best to get some specific information from an external source. A financial adviser can offer advice tailored to your situation and help you map out a plan for how equity will affect your income over the years to come.

Also tagged with