Mavenology.

You just received your first job offer with equity as part of your compensation package! Congratulations! But perhaps you’re wondering what exactly this means. Don’t worry, you’re not alone. In this article, we’ll break down everything you need to know about equity so you are better prepared to either negotiate or exercise your options.  

While most tech companies have been offering equity to candidates for years, larger or more-traditional firms have begun offering ownership programs to potential applicants more recently. However, these plans may be opaque in how they work, and their terms can vary company by company, so it’s important to ask questions about how your equity program works.

First things first, it’s important to remember that equity is long-term compensation. Heavy emphasis on long-term. The company is providing the opportunity to purchase proprietary shares in exchange for your tenure and performance. Equity programs are usually designed to favor employees with longer tenures to reward the value those employees have built, so it’s important to consider the length of time you are willing to invest, as some equity programs require you to purchase your shares, and you may not receive a return on that investment for years, if ever (hope this doesn't break your heart).

The first items to consider are:  

1. Number of Shares Offered – equity packages may be offered in number of shares (50,000 shares), or in a certain dollar value of shares ($100,000 USD worth of shares). It’s important to note that if a company has a new valuation, the cost or value of your equity package may be affected (positively or negatively)

2. Price(s) – it’s important to know both the price you will pay to exercise your options (if you have to) which is also sometimes known as the strike price, and the price your shares are currently worth

• If your company has not yet planned an IPO, this price will likely remain fixed between valuations, and not adjust frequently like stock on the open market
• If you have to purchase your shares, the exercise price will likely be discounted from the shares’ actual value

3. Total Value – your number of shares multiplied by the price your shares are worth is your Total Value, but this value will likely vest over the course of several years, so to get an accurate picture of how this adds to your compensation:  

• Take the Total Value and divide by the number of years you’ll need to be fully vested.  Ex.: If you have a $100,000 equity package vesting over 4 years, you can consider this an extra $25,000/year of long-term compensation at the company’s current valuation

Next, because this is compensation, your equity package will be taxed (welcome to adulting...), but when and how it will be taxed, and how you will report that income, will be very different than your base salary or bonus. Because everyone’s situation is different and because the type of options you receive could be treated differently from a tax perspective, you should speak with a licensed tax advisor so there are no surprises!

Your vesting schedule can also vary by company. Vesting is when your shares become yours to own (now we’ve got your attention!) whether you remain employed at that company or leave, and this usually happens over a multi-year period. If you leave the company, any shares that are not vested will be retained by the company. And if you have purchased options that didn’t vest yet, they will refund you the original purchase price, not the current value.  

The most common vesting schedule is four years, with a “one-year cliff,” where you vest 1/48^th of your total equity package each month, for 48 months (4 years), but there’s one catch. None of your shares vest during your first 12 months because conventional wisdom says you haven’t contributed enough value to the company if you leave before then (brutal, we know). The good news is, you earn those 12 months of vested shares all at once at the end of your first year, then 1/48^th worth every month after.  

Companies will sometimes offer additional shares as bonuses or performance rewards, but of course, these likely come with vesting schedules as well. If you haven’t picked up on it by now, employers want to make sure you always have a reason to think twice before leaving for another job, aka “golden handcuffs!”

So I know what you’re thinking... “When do I actually get paid?” The most common ‘liquidity events’ are a) when your company is acquired, and the new company purchases the outstanding shares (including yours), or b) your company begins selling shares on a stock exchange (known as an IPO, or initial public offering).  

Some companies will offer to purchase vested shares from employees at their current value prior to an acquisition or an IPO, as a way to let them exercise early, but if your company is offering this, they likely believe the shares will grow in value, so consider carefully before you cash out and buy your new Mercedes.

Still have questions? Connect with your Maven Recruiter to help you prepare for your negotiation conversation and view our Compensation Guide for the latest intel regarding equity offered in compensation packages for Executive Assistants.  

Written by Kevin Baker