Equity compensation is a form of payment that gives you a stake in the company you work for. It can be a valuable tool to negotiate a better salary, especially if you join a startup or a fast-growing business. In this article, you will learn what equity compensation is, what types are available, how to evaluate its worth, and how to negotiate it effectively.
There are different types of equity compensation that you may encounter in your job offer. The most common ones are stock options, restricted stock units (RSUs), and employee stock purchase plans (ESPPs). Stock options give you the right to buy a certain number of shares at a fixed price in the future. RSUs are grants of shares that vest over time, meaning you get to own them after meeting certain conditions. ESPPs allow you to buy shares at a discounted price through payroll deductions. Each type has its own benefits and drawbacks, depending on the company's performance, tax implications, and vesting schedule.
When negotiating, understand the vesting schedules and analyze the potential future value. RSUs provide more predictable income, while stock options offer higher but riskier returns. Having equity in a fast-growing startup can hugely boost overall compensation.
Figuring out the worth of equity compensation can be a challenge. Unlike cash, equity is not guaranteed and depends on the company's valuation, growth potential, market conditions, and dilution risk. When estimating the value of your equity compensation, you must consider the number of shares or options you receive and the percentage of ownership they represent, the strike price or grant price, the fair market value (FMV) or current share price, the expected appreciation or depreciation of the share price over time, the vesting period and schedule, the expiration date, and the tax treatment. Online calculators or formulas can be used to estimate the value of your equity compensation; however, these are based on assumptions and may not reflect actual outcomes. Therefore, it is important to consult a financial advisor or a tax professional before making decisions.
I would add that you need to know the company's future plans for exit as well or ask questions regarding how you will be able to sell these shares - will there be a tender offer by the company or secondary sales, in case exit does not happen years after end of the vesting period. Otherwise, it's just an illiquid asset (cash on paper) you will hold and possibly have tax consequences.
Equity compensation can be a powerful tool to negotiate a better salary if you have a high-demand skill or unique value proposition. To maximize the benefit, it's important to be strategic and informed about how to approach the negotiation. Do your research to find out the market rate for your role and industry, the average equity offer for similar positions and companies, and the employer's valuation and growth prospects. Additionally, consider your priorities and what matters most to you: cash, equity, or other benefits. Ask questions about the type, amount, and value of the equity, the vesting and expiration terms, the tax implications, and the exit scenarios. If you're not satisfied with the initial offer, make a counteroffer that reflects your value and expectations. Finally, get the agreement in writing and review it carefully before signing. By following these tips, you can leverage your equity compensation to negotiate a better salary and secure a rewarding career.
Negotiate vesting and expiration — Try to negotiate accelerated vesting or extended exercise periods for stock options. Understand the tax implications — Know how equity compensation will impact your taxes owed and factor this into negotiations.