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How can you evaluate the value of equity and stock options?

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If you are considering a job offer that includes equity and stock options, you might be wondering how to assess their value and compare them with other compensation elements. Equity and stock options are forms of ownership or potential ownership in a company that can provide significant financial rewards if the company succeeds. However, they also involve some risks and uncertainties that you should be aware of before accepting or negotiating them. In this article, we will explain what equity and stock options are, how they differ, and how you can evaluate them using some key factors and tools.

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1 What is equity?

Equity is the percentage of ownership that you have in a company. It represents your share of the company's assets, profits, and growth potential. Equity can be granted to employees in various forms, such as restricted stock, restricted stock units, or stock appreciation rights. Depending on the type and terms of the equity grant, you may have to pay taxes, vesting periods, or other conditions to access your equity.

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Mehdi Nejadrasouli

Senior Human Resources Manager | ICF Associate Certified Coach (ACC)
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Equity and stock options are very good solutions to hire high level employees and manager and help them feel have ownership!

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Peggy McGillin, CFP?

PRINCIPAL | CERTIFIED FINANCIAL PLANNER TM | INVESTMENT ADVISOR | FOUNDER | CEO | FIDUCIARY | EXECUTIVE EQUITY COMPENSATION | TAX PLANNING
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Understanding your plan and how to set up a spreadsheet to keep track is important but it takes specialized knowledge. Heck, even knowing which documents to download from the custodian trips up many people. Keep your award letters and all plan documents in one place. If offered executive equity compensation hire a CFP(R) or CPA with a niche in this area to make the most of your company’s award plan.

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2 What are stock options?

Stock options are the right to buy a certain number of shares of the company's stock at a predetermined price (called the strike price) within a specified time frame. Stock options can be either incentive stock options (ISOs) or non-qualified stock options (NSOs), which have different tax implications and eligibility requirements. Stock options can be valuable if the company's stock price rises above the strike price, allowing you to buy the shares at a discount and sell them for a profit. However, if the stock price falls below the strike price, the options may become worthless or underwater.

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Peggy McGillin, CFP?

PRINCIPAL | CERTIFIED FINANCIAL PLANNER TM | INVESTMENT ADVISOR | FOUNDER | CEO | FIDUCIARY | EXECUTIVE EQUITY COMPENSATION | TAX PLANNING
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Non-qualified stock options (NSOs) are much more common now than Incentive stock options (ISOs), and they are less risky to employees due to the difference in taxation. If you are offered equity compensation there is some learning involved to get the most out of it. Work with a CFP(R) or CPA who can help you come up the learning curve better and faster. People can get ahead of their skis with spending and end up being surprised when they owe taxes and have cash flow problems due to incorrect mental math regarding their compensation.

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3 How to compare equity and stock options?

Equity and stock options are not directly comparable, as they have different characteristics and risks. Equity gives you immediate ownership in the company, while stock options give you the potential to own shares in the future. Equity is usually more stable and predictable, while stock options are more volatile and dependent on the market. Equity may have lower tax rates, while stock options may have higher tax rates and fees. Equity and stock options also have different vesting schedules, expiration dates, and dilution effects.

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4 How to evaluate equity and stock options?

When evaluating equity and stock options, you need to consider the amount and percentage of equity or stock options offered, the current and projected valuation of the company, the vesting schedule and cliff period, the strike price and expiration date, the tax implications and fees, as well as the dilution risk. To assist in this process, you can use an equity calculator to estimate the value of your equity, a stock option calculator to estimate the value of your stock options, and a tax calculator to estimate the tax liability and fees. All these factors should be taken into account when comparing your offer to industry standards and benchmarks.

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Grant Glenn, CFA, CFP?

Individual Wealth Strategist | Financial Advisor | Co-founder
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Equity Compensation, such as Restricted Stock or Stock Options (ISOs or NSOs), can shape your financial journey. Recognizing what you're receiving is vital. Stock options often signify you're with a startup or an early-stage company. It's important to understand the company's business strategy and potential growth paths. On the other hand, restricted stock usually points to a more mature company. Be mindful of your compensation breakdown: salary, bonus, and the split between cash and restricted stock. Grasping these details can greatly influence your financial outlook. It's more than just compensation; it's your future.

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5 How to negotiate equity and stock options?

If you are not satisfied with the equity or stock options that you are offered, you can try to negotiate for a better deal. It is important to be realistic and respectful, and understand the trade-offs and constraints that the employer may have. To get the best deal, do your research to know your worth and use data and evidence to support your request. Focus on the value and impact that you can bring to the company, and how your equity or stock options align with your goals and expectations. Be flexible and creative, exploring different options and scenarios that can benefit both parties. Communicate clearly and confidently, asking questions and listening to feedback. Finally, be prepared to walk away if the offer does not meet your minimum requirements or standards. Equity and stock options can be a valuable part of your compensation package if negotiated properly; therefore, it is important to assess them using key factors and tools to make informed decisions about your career and finances.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you evaluate the value of equity and stock options?

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6

1 What is equity?

2 What are stock options?

3 How to compare equity and stock options?

4 How to evaluate equity and stock options?

5 How to negotiate equity and stock options?

6 Here’s what else to consider

Job Search Strategies

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How can you evaluate the value of equity and stock options?

1

2

3

4

5

6

1 What is equity?

2 What are stock options?

3 How to compare equity and stock options?

4 How to evaluate equity and stock options?

5 How to negotiate equity and stock options?

6 Here’s what else to consider

Job Search Strategies

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