The Completely Underrated Thing You’re Not Negotiating In A Job Offer
Getting a job offer, especially from a company you’d love to work for, is always exciting. But before you respond saying, “Yes, yes, yes!” take a second to think about whether you’d like to negotiate. If you’re heading into startup land or you’re in a high enough position to be considered one of the leaders at the company, you could be able to negotiate for one thing you may not be aware of: equity.
In business terms, equity gives you direct or indirect participation in the ownership of the company. This can come in many forms – options, restricted stock, profits interest or phantom equity just to name some of the more common forms of equity programs. If you successfully negotiate for equity, you will have the opportunity to participate in the overall success of the company. And yes, this can be very meaningful. In the best cases, key employees (and sometimes even mid- or entry-level employees), can walk away with six and seven figure paydays if the company turns into a homerun. The basic explanation: you have a financial stake in a company that you get to help build and grow.
So, why would you want to negotiate equity? Well, if your company is new or relatively young, you likely have a better chance of getting equity in the first place. Depending on just how new your company is and the role you will be playing, you could end up with a small percentage of ownership of that company through equity, which means you could make bank if the company becomes successful and sells later down the road. There is also always a chance that the company may not sell in the time that you’re there or that it won’t sell for as much as you hoped — or, it may go down the drain. It’s a gamble, but an exciting one at that.
In order to fully understand what your options are if equity is on the table, ask the following questions.
1. What form does my equity take?
Your company could offer you equity in many forms, with restricted stock, stock options and performance shares being three of the most common. We’ll focus on these forms for the sake of keeping it simple, but be aware that your company could offer a variety of equity packages.
Depending on your company and whether it’s publicly traded or private, you could be dealing with the ability to own restricted stock or stock options. Receiving stock options means that you get to exercise the option to buy or sell a certain number of shares at a predetermined price within a certain amount of time. Often options offer a “cashless exercise” meaning you never actually buy the shares — you just get the difference between your pre-defined purchase price and the ultimate selling price. Restricted stock, on the other hand, is granted to you by the company (you don’t buy it) with restrictions, so you’ll likely wait a certain amount of time before you can turn these shares into money. And performance shares are shares that the company gives you under the stipulation that the certain company-wide performance criteria are met.
2. How much equity am I getting?
When you’re granted equity of a company, you want to be sure of not only what type of equity you’re getting, but also what that means. How many shares are you receiving, for example, and more importantly, what percentage of the company do those shares represent?
One of the first questions you should ask your organization is how much each share is worth and what percentage of the company it represents. Shares could mean nothing if they’re worth a penny each and represent a tiny fraction of the larger company, though with new, promising companies, you might consider overlooking this if you think that particular company could be sold for millions a few years down the road.
What happens after you jump on your company’s equity train is hard to say. It’s not easy to predict how much you’ll gain in the future, but you can make an educated guess by doing research on what you’re buying into (or being given) and how successful you think your company could be.
And be realistic in terms of your expectations. With a little research you can find out what other similarly situated people are getting (at your company or similar companies) — this is your benchmark for what you might expect.
3. What is the strike price?
If your company offers stock options which allow you to buy a share of stock as part of its equity program, whatever price you buy that share for is the strike price. That means that if you buy a share for $10, that $10 is the strike price. This price will determine how much money you could get if that stock sells. How do know if buying a share is worth it? Do some research on the stock and see if there’s enough historical data on its performance, or if it’s a newer firm, evaluate the potential you see for the company’s success.
4. What’s the vesting period for this equity?
If your company has an equity program, it’s rare that you get all of the equity day one — if a company did that, you could say A-B-Cya and quit the next day with the equity in your pocket. To ensure your ongoing commitment, companies typically allow you to gain ownership over some period of time — often three to four years. This is called vesting.
For example, if your company has a four year vesting provision and you receive options to buy 10,000 shares, on the first, second, third and fourth anniversary of your joining the company, you’ll get options to buy 2,500 shares. Most programs also provide for accelerated vesting. Continuing with the same example, in the event the company is sold after 18 months, you’d get your full set of options to buy 10,000 shares at that time. And when the sale is finalized you get the difference between the strike price — let’s assume $1 per share and the selling price — let’s say $15 per share. So in this example your getting 10,000 shares x $14 per share or $1.4 million. And yes, this is how all those little propeller heads in Silicon Valley have made truckloads of money.
We know, we know — there’s a lot of stuff to learn when it comes to equity. But get the basics down and know what questions to ask and you’ll be golden. Getting advice from someone experienced in these matters is also probably a good idea. Whether equity is something you want to dive into or not, know that it could be a serious option before you accept your potential position and sign the paperwork. The more you know, the more you could earn!