An Introduction To Stock and Shares When Joining a Company

Working in the life science market for the last 6 years, I’ve been asked a lot by candidates about share packages, how they work, and what benefits they could bring to them (especially when?joining start-ups).?

With this becoming more and more common in the industry to be added to compensation packages, this is something I’ve spent a lot of time getting my head around, so I thought I’d give a quick overview of equity offerings and what they might mean to you. Please note that I am no financial expert, this is just my understanding based on what I’ve learned. I’ll link some useful articles below if you’d like to read more.

So, let’s get into it!

What are stocks and shares?

Stocks, shares, equity, and share options are all terms used to describe different units of ownership in a company. They are often used together, but there are some important differences between them.

• ‘Equity’ is a broad term for a company’s total assets and wealth (minus any debts and liabilities). When you own stock or shares in a company, you own a portion of the company’s total equity. As such, shares are sometimes referred to as ‘equities’.
• ‘Shares’ are clearly defined fractional units of ownership (or units of ‘stock’) in a company. A firm’s ownership may be divided into any number of shares, and an organisation can therefore have any number of shareholders. Shares entitle the owner to varying levels of influence in the firm’s management, as well as to proportions of assets and profits, depending on the organisation and their individual ownership structure.
• ‘Stock’ refers to ownership of some portion of a company’s equity, usually in the form of shares.
• ‘Share options’ (sometimes called ‘stock options’) are granted by the firm and give employees or other stakeholders the right to buy a pre-defined number of shares at a pre-agreed price at some point in the future. Many startups set aside an ‘equity pool’ of between 5-15% of their total equity to offer as share options.

In the context of share options, ‘strike price’ is the pre-agreed price at which the owner of the options will be allowed to purchase shares for when they exercise the options in the future (buy/sell the shares).

Why do companies (particularly start-ups) offer equity?

The primary reason why startup businesses offer share options is that they give individual employees a personal, financial stake in the success of the business – they may directly benefit financially from the firm doing well. This helps attract candidates who are truly bought into the mission and believe in the leadership of a company; it motivates employees and increases long-term commitment to the organisation. Particularly for early-stage start-ups, having this kind of buy-in from new employees is powerful.

The second main reason for offering equity is simply to help attract talent. Share options are a great add-on to a compensation package to help attract individuals who might receive a more competitive salary in a larger, well-established organisation. In this case, equity is a form of financial incentive to attract talent in a way that doesn’t cost the business cash in the meantime.?

So how do share options work?

This should give you an idea as to how share options generally work. However, please note that this process will be unique to each firm and the specifics should be ascertained through conversations with your prospective employer.

In your proposed contract/compensation package, you will be offered ‘share options’ for a small percentage of the company’s equity - usually, a fraction of a %, which sounds minuscule, but when it comes to equity 1% is a lot! This means that at some point in the future (usually when the company is bought or floated), you will have the option to buy the associated number of shares at their ‘strike price’ - a low, pre-defined price in line with the company’s early valuation - to then re-sell them at the market share price, when the company’s valuation/total equity is much higher.

In reality, there may be no ‘buying and selling’; when you exercise your options at a future date, you can simply receive the cash value of the difference between the strike price of your shares (as set out in your package, ?usually based on the valuation of the company at the time of joining) and the market price. At this point, you simply walk away with an often-significant sum of money, in reward for your early buy-in and commitment to the firm.

Alternatively, you may choose to buy and keep the shares, at which point you will become a shareholder, officially holding equity in the company, and taking on shareholder rights such as rights to dividends.

The specifics of these transactions – the amount of equity offered, the strike price of your share options, timescales, conditions for exercising options, and tax implications – will vary company by company.?

To offer one example: say you join a company and are offered 1000 shares at a strike price of $1 per share, and let’s say these 1000 shares represent 0.3% of total equity. If, at a point in the future, these shares are revalued at $200 per share, you can exercise your share options and walk away with $200,000.?This isn’t uncommon in the life science industry.?

What are the pros and cons?

Pros

In the case that your company does well and is acquired or goes through an IPO somewhere along the line, you may well walk away with a considerable sum of money. Even better, you are unlikely to pay significant tax on this windfall.

You are also likely to enjoy other benefits of working in a startup, such as higher job satisfaction, variety, team cohesion, and responsibility, as well as a dynamic working environment and learning opportunities. Many people find that personal investment in a company doing well is highly motivating.

Cons

The reality of share options is that, more often than not, they don’t come to anything. Unfortunately, there are no guarantees, and any earning potential through share options should be considered a nice possibility, never a definite outcome.

When evaluating a firm’s compensation package, your decision should be based more on your personal working style - whether you feel you are suited to and motivated by the nature of a startup as a place of work. Employees who are only interested in the greatest possible salary, benefits, and job stability are likely better suited to a larger, more well-established organisation. However, share options are just one of the more dynamic and exciting elements of working for a start-up.

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If you’re looking for a job in life sciences, or are a startup looking for hiring support, don’t hesitate to get in touch at…

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If you’d like to learn more about share options in startups, here are some articles you might find helpful:?

• A useful guide to different forms of share option schemes in the UK: https://www.globalshares.com/uk/academy/uk-employee-share-plans-and-their-tax-implications-your-complete-guide/
• What’s the difference between shares and share options? https://seedlegals.com/resources/shares-vs-options-whats-the-difference/#how-are-share-options-taxed
• A broader look at stock and share ownership: https://www.ig.com/uk/shares/what-are-shares
• My colleague Tom on some of the benefits of working for a startup: https://www.inveniagroup.com/blog/why-you-should-join-a-genomics-startup/