Be Honest: You’re Still Not Sure What Vested Stock Options Are
-by Jaclyn Westlake, Founder of The Job Hop
You’ve polished your resume, networked your tail off, and interviewed like a champ, and now all of your hard work has finally paid off in the form of a brand new job. Scoring a stellar offer is a pretty great feeling, but deciphering all of the legalese that will probably pop up in your official offer letter can be a real buzzkill (what the heck is profit sharing, anyway?). While reading the fine print of your offer letter might sound pretty dull, you’ll find tons of useful pieces of information about the terms of your employment, benefits, and stock options if you take the time to look.
Read on for the lowdown on what you’ll probably find in your next offer letter – and what it all means.
First and foremost, your offer letter should include the details of your employment. To start, you’ll want to be sure that the content of your written offer lines up with what was discussed throughout your interview process. This will include your job title, salary, pay frequency, start date, work schedule, and who you’ll report to.
You’ll also want to keep an eye out for conditions of employment like references or background checks. These contingencies essentially give your future employer the right to rescind your offer if something fishy pops up in your background check, you get a less than stellar reference, or fail a drug test.
Your offer letter should contain loads of juicy details about paid time off, benefits, and bonuses. You’ll want to be sure that you understand the full scope of these benefits, so there are no surprises after you start your new job. Here’s a quick rundown of what you’ll want to know:
1) Health Benefits: What Do You Get and How Much Will It Cost?
Most employers will offer some combination of medical, dental, and vision insurance – but the details of these benefits offerings can vary quite a bit.
· Which insurance providers (i.e. Blue Cross, Kaiser, Delta Dental, VSP, etc.) does the company work with?
Some companies offer a couple of different plan options, while others may only have one available. You’ll probably want to set aside some time to confirm which providers your current doctors accept.
· How much will each plan cost you?
Some extra awesome employers are able to cover 100% of their employees’ insurance premiums, while others pass a portion of the total cost onto you. Be sure to clarify what your monthly employee contribution will be so that you can budget accordingly.
If you’re hoping to add a partner, child, or other dependent to your insurance plan, you’ll want to request details on how much each additional person will cost you each month. Your rate may be different than your partner’s.
· When are you officially eligible for benefits?
It’s common for there to be a brief waiting period between your start date and the day your coverage begins, so it’s important to be 100% sure that you know when your benefits officially kick in so that you can arrange interim coverage if needed.
2) Bonuses: Discretionary & Performance-Based
Extra money is always fun, but figuring out when and how you’ll get your bonus can get a bit confusing. Understanding the difference between a discretionary bonus and a performance-based bonus is a good place to start.
A discretionary bonus is variable and completely up to the discretion of your employer. In other words, you may get a generous lump of cash one year and nothing the next.
A performance bonus is based on specific criteria; like how many deals you close each year or whether or not you successfully complete a product launch. If you meet your goals, you can expect to receive your bonus.
3) Vacation, Sick & PTO
Thanks to the San Francisco Paid Sick Leave Ordinance, most companies with a presence in the city have to offer their full-time employees at least nine days (or 72 hours) of paid sick time each year. Some companies choose to roll this time up into Paid Time Off (PTO) and allow their employees to use their sick time however they’d like. Others keep sick and vacation time separate. Getting clarification on how your new company handles PTO will help you to budget your time off.
The Nitty Gritty Legal Stuff
Here’s where things get a little tricky. Unless you went to Harvard Law (we’re looking at you, Elle Woods), chances are you’re probably not familiar with the legal jargon that you’ll come across. Let’s be real - does anyone really know what at-will employment means? Lucky for you, we do!
1) At-Will Employment
In a nutshell, at-will employment clauses enable you or the company you work for to end your employment at any time with or without cause. In other words, your future employer can fire you whenever they want. This may sound a little scary, but this clause applies to you, too! It’s also your right to peace out on your new job at any time for any reason (“you only brew Keurig coffee here? I quit!”). Not that you would leave without giving any notice – you’re way classier than that.
2) 401 (k): Profit Sharing & Employer Match
Companies offer 401 (k) plans to help their employees save for retirement. These plans allow you to transfer a set amount of money from each paycheck (before it’s taxed) into an investment account. The money you accrue in your 401 (k) won’t be taxed until you withdraw it. Some employers also offer profit sharing or an employer match (a.k.a. free money!) as an added perk.
Profit sharing plans are essentially discretionary employer contributions. Your company may decide to share a portion of its profits with their employees. This amount will vary depending on how well the organization is doing financially and is generally a small percentage of the company’s net earnings.
As the name suggests, an employer matching plan means that your employer will match a certain percentage of your annual 401 (k) contributions. For example, your company may match 50% of your total contributions for up to 4% of your annual salary. This means that if you earn $50,000 a year and contribute 4% of your salary ($2,000) to your 401 (k) account each year, your employer will also contribute 50% ($1,000). Pretty cool, right?
3) Stock Options, RSUs & Equity
Public Companies (Organizations Already in the Stock Market)
When a company says that they offer stock options, they really mean that as an employee, you will have the opportunity to purchase a certain number of shares of company stock at a set price (typically at or below current market value) at a pre-determined future date. For example, if your new company’s stock currently sells for $15 a share, your company may give you the option to purchase a pre-determined amount of stock for $10 a share after a certain period of time (there’s typically a waiting or vesting period before you can exercise your stock options). This could mean instant capital – if you’re able to buy 50 shares at $10 a piece ($500 total), and the shares are actually worth $15 a piece ($750 total), you’ll have instantly made $250. Just bear in mind that if you sell your stock, the profits will be taxed as a form of income.
Restricted Stock Units (or RSUs) are a grant of company stock that will be distributed after you’ve met a pre-determined vesting requirement (waiting period). In other words, it’s an I.O.U. from your company and a promise that you’ll get your shares after you’ve been employed for a certain amount of time. The perk of an RSU is that you don’t actually have to purchase the shares yourself – they’ll be given to you. This could mean even more money in your pocket. For example, if each company share is worth $15 and the company gives (distributes) 50 shares to you after your vesting (waiting) period, you would instantly have $750 in capital. Again, keep in mind that this will be taxed if you decide to sell your stock for a profit.
Equity refers to actual ownership in a share of the organization (actual stock shares). In other words, stock options give you the opportunity to purchase stock in the future. Once you’ve purchased (or been given) shares, you will have equity in the company.
Private Companies (Pre-IPO)
If an organization isn’t currently publicly traded on the stock market, they can still offer options or shares (equity) in the company. The catch is, these shares won’t be worth anything unless the company is sold or actually goes public. For example, if your company allows you to purchase 50 shares at $10 apiece, you’ll have the equivalent of $500 of equity in the company, but won’t make any additional capital or profit unless the company IPOs (goes public on the stock market). If your company’s stock sells for more than $10 a share after going public, you’ll gain capital. If your company doesn’t go public but is sold or acquired by another company, you’ll be paid for your shares. This means that if you have 50 shares in the organization (worth $500 in total - $10 apiece), and the company sells for the equivalent of $15 a share ($750 for 50 shares), you’d make $250 in profit.
Yikes! We know this is a lot to take in. Here’s a quick and dirty rundown of everything you just learned:
· Stock Options give you the opportunity to purchase shares of your company’s stock. This is typically after a set vesting (or waiting period) and generally for a pre-determined price.
· Shares are the actual units of company stock you may purchase or be given by your employer.
· RSUs are shares of stock that are given to you by the company (no purchase necessary) after a pre-determined vesting (waiting) period.
· Public Companies already have stock available for purchase in the stock market. You will earn capital if you purchase this stock for a price that is below market value (at the discretion of your company) or when the value of the company’s stock rises after you’ve purchased it.
· Private Companies don’t have stock available for purchase in the stock market. They may be pre-IPO (planning to go public) or have no intention of going public. Your shares will be worth money after the company either goes public or is sold.
· Your stock options will pay off if you work for a public company that either gives you or allows you to purchase stock for below market value or the company’s stock value increases after you’ve purchased it OR if you work for a private company that goes public or gets sold after you’ve purchased or been given shares.
Stock options and equity can be great perks – we’ve all heard stories about employees becoming overnight millionaires when their company goes public – but there are simply no guarantees. Regardless of whether your future employer is pre-IPO or has already gone public, you never know what the stock market will do. While exercising your stock options can be a great investment (or a total no-brainer if your company gives them away), you’ll want to consider your total compensation package (salary, benefits, PTO, etc.) when deciding whether or not you should accept an offer.
Regardless of whether or not you’re offered stock options or an RSU, you’ll want to understand how this whole “vesting” think works. Vesting refers to the amount of time you’ll need to be employed at an organization before you have 100% ownership of your shares, 401 (k) employer matches, or profit sharing contributions. It’s basically a waiting period.
Your vesting schedule may state that you have to be employed with your company for three years before you have full rights to your shares. In this case, your options or shares would probably vest (become available to you) at a predetermined rate over the course of your vesting schedule. This means that if you have a three-year vesting period, your options will likely vest at a rate of 33% each year (33% ownership after one year of employment, 66% after two years, and 100% after 3 years). This means that if your employment is terminated before you reach your three-year anniversary, you might forfeit a portion of your options or potential earnings.
Pretty simple, right? Vesting = waiting period. Now the next time your friend says she can’t leave her awful job until next year because she’s not fully vested yet, you won’t have to smile and nod while silently hoping someone changes the subject.
5) Confidentiality & Dispute/Arbitration Agreements
Confidentiality agreements essentially state that you understand that you’ll probably have access to some super-secret company information over the course of your employment and that you promise not to share any confidential details about the organization or its clients with anyone outside of the company.
Dispute/Arbitration Agreements mandate that any future, hypothetical disagreements between you and your employer would be handled through private arbitration and outside of court.
Still have questions? That’s totally normal. Any good recruiter, HR representative or hiring manager will expect you to come back to them with questions, clarifications, and concerns. Just be sure to be specific about what you need help deciphering.
Offer letters contain a dizzying array of information, but it’s nothing you can’t handle! Keep an eye out for the basics, read up on your benefit options, and take a little extra time to be sure that you really understand all of the tricky language you come across, and you’ll be ready to accept that new offer with total confidence in no time.