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Last updated on 2024年6月6日

How do you evaluate equity or stock options as part of your total compensation?

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When considering a job offer, it's crucial to evaluate not just the salary but also the equity or stock options included in the total compensation package. These can be a significant part of your income, especially in start-ups or tech companies. Understanding the value of equity requires a grasp of the company's potential growth and the specifics of how the equity is structured. It's not just about the number of shares but also about the vesting schedule, the type of equity offered, and the overall health of the company. By carefully assessing these factors, you can make an informed decision about the true worth of the stock options in your compensation.

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?? Thomas Lewin

Your Work, Your Wealth. You deserve great employees, you deserve less stress, you deserve to sell your business.

1 Understand Equity

Equity represents ownership in a company and can come in various forms, such as stock options or shares. When evaluating equity as part of your compensation, it's crucial to understand what type of equity you're being offered. Stock options give you the right to purchase shares at a set price after a certain period, known as vesting. Shares, on the other hand, are actual ownership pieces that you receive outright or according to a vesting schedule. The potential for equity to increase in value is tied to the company's success, so you'll need to consider the company's growth prospects and market position.

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2 Vesting Periods

The vesting schedule is a critical aspect of equity compensation. It dictates when you can actually claim your stock options or shares. Typically, there's a 'cliff' period, usually one year, after which a portion of your options vests, and the remainder may vest monthly or annually over a set period. It's important to understand this timeline because it affects when and how much of your equity you can actually own. If you leave the company before the vesting period ends, you might forfeit some or all of your equity, so consider your long-term commitment to the company when evaluating this part of your compensation.

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?? Thomas Lewin

Your Work, Your Wealth. You deserve great employees, you deserve less stress, you deserve to sell your business.
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The standard go to startup vesting schedule is 1 year cliff with monthly vesting after 3 years. I advise all my clients not to do this, why? Because it can create a culture of sit n vest, employees who are only staying and doing the bare minimum to have their equity vest. The most effective vesting schedules are ones that utilize performance & milestone conditions. For example you could add a target number of sales to be hit by a certain date for a salesperson in order for their equity vest. Don't fall for the Silicon Valley startup vesting schedule, it's common but it's not the best.

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3 Strike Price

The strike price, also known as the exercise price, is what you'll pay to convert your stock options into shares. Evaluating whether this price is favorable involves looking at the current valuation of the company and projecting its future growth. If you believe the company’s share price will rise significantly beyond the strike price, your options could become highly valuable. However, if the share price doesn't increase or drops, your options may be worth less than expected or even become worthless. Therefore, understanding market trends and the company's business model is essential for assessing the potential value of your options.

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4 Market Value

The current market value of a company's stock is a snapshot of what investors are willing to pay for it. For private companies, this information may not be readily available, so you'll need to rely on the most recent valuation, such as during a funding round. For public companies, stock prices are available on exchanges. Comparing the market value with your strike price can give you an indication of the potential immediate financial benefit of your stock options. Keep in mind that market conditions can change rapidly, so consider this a variable factor in your evaluation.

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5 Tax Implications

Taxes can significantly affect the net value of your equity compensation. Different types of equity are taxed differently, with stock options typically being subject to income tax at the time of exercise and capital gains tax when sold. The timing of when you exercise and sell can have major tax consequences. For instance, holding shares for more than a year after exercising options may qualify for long-term capital gains tax, which is usually lower than short-term rates. It's advisable to consult with a tax professional to understand how your equity will be taxed and to develop a strategy that minimizes your tax burden.

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?? Thomas Lewin

Your Work, Your Wealth. You deserve great employees, you deserve less stress, you deserve to sell your business.
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Tax implications vary from plan to plan.. - Startup Plans typically don't impact your income tax but will have larger capital gains tax on sale because you're typically seen as getting the equity for $0. - Tax exempt plans, these plans are usually small gifts and aren't taxed if you earn less than the threshold. - Tax deferred, these plans are rights (RSUs) & options that are not qualified for startup plans. Typically (the value of the shares minus what you paid) * the number of shares received will be added to your accessible taxable income. With tax deferred it's always a good idea to ensure you set aside some money to cover tax, for private markets it's a good idea to ask your company if they'll buy back some shares to cover tax.

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6 Company Health

The overall health and future prospects of the company offering equity are perhaps the most significant factors in evaluating stock options. A company with strong leadership, a clear competitive advantage, and a track record of growth is more likely to increase in value, making your equity more valuable. Conversely, a company facing challenges or operating in a volatile market may pose more risk. Pay attention to the company's financial statements, industry position, and any news that could impact its future performance when considering how much weight to give equity in your total compensation package.

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7 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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?? Thomas Lewin

Your Work, Your Wealth. You deserve great employees, you deserve less stress, you deserve to sell your business.
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1. What happens when you leave? If you leave due to external forces (resign, death or disability) you'll be considered a good leaver and the board will push forward all your vesting. Resigning can result in the loss of your unvested equity. If you're fired you may lose everything! 2. How will you get money? Liquidity is a problem in startups, that's the ability to sell your shares. It's a good idea to work out when and how you'll sell your shares in the future. 3. What happens at an exit event? Exit events can be IPOs, Sale of the company, even bankruptcy. Your plan rules will explain what happens at an exit event, in some cases of a sale or IPO your equity will all vest and become available in other cases it may have no changes.

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Kristīne Mora

Senior Lawyer | Head of Legal | Specialising in Fintech, Startups & Crypto Regulation ??
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In addition to above mentioned, it is crucial to evaluate the following: 1. Bad Leaver and Good Leaver terms: Would you be stripped of any already vested options in case you change jobs, or will you be able to hold on to already vested options? 2. Exercise of the options: if and when will your options be exercised? Is the exercise window set at specific times or only at the exit event? Will you have the funds to exercise? 3. Liquidity events: Ask the company—have there already been liquidity events for employees? What was the outcome? Are liquidity events planned for the future as yearly events for employees, or do you have to wait for specific events to happen?

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How do you evaluate equity or stock options as part of your total compensation?

1

2

3

4

5

6

7

1 Understand Equity

2 Vesting Periods

3 Strike Price

4 Market Value

5 Tax Implications

6 Company Health

7 Here’s what else to consider

Business Management

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How do you evaluate equity or stock options as part of your total compensation?

1

2

3

4

5

6

7

1 Understand Equity

2 Vesting Periods

3 Strike Price

4 Market Value

5 Tax Implications

6 Company Health

7 Here’s what else to consider

Business Management

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