Stock options can be complex to understand – which is exactly why it’s important to have a firm grip on what they mean before heading into a negotiation. In most cases, it’s not advisable to take a pay cut in favor of stock options, as much as HR wants you to believe. Stock options should be treated as the icing on the cake to a base salary that you are satisfied with.
So what exactly are employee stock options? Basically, a stock options give employees the right to buy a pre-specified amount of shares in the company over a certain timescale at a pre-determined price, which is generally lower than the price offered to investors.
You’re sitting down to a salary negation, and you’re offered a stock option plan. Don’t sweat it – just ask the right questions:
1. If I don’t choose stock options, would there be an opportunity for higher wage compensation or other benefits?
Stock options can be an easy way for a company to compensate employees. However, while we all hope our company succeeds, stock options may eventually become worthless if the company flounders. Additionally, if you’re in a private company and the horizon for going public seems way far in the future, you may want to consider a more liquid form of compensation. But if the stock options you’re being offered are not stand-ins for more valuable benefits (and this depends on your own personal value scheme for what the hierarchy of valuable benefits is), then go for it.
2. What is the vesting schedule?
The vesting schedule basically refers to the time frame within which your stock options become exercisable. Make sure that the vesting schedule fits within the time span that you see yourself working at the company. Also ask about cliff vesting – often if you leave before the “cliff” your contract specifies (let’s say the cliff is one year, and you leave after six months), then you don’t get to exercise any of the stock options.
3. What percentage of the company’s stock do these options make up?
A high number of company shares can seem attractive, but don’t let it fool you – it’s all about the percentage of company stock as a whole. Also be sure to ask what they’re defining as company stock, to make sure they don’t leave anything out of the calculation, such as stock options outstanding to other employees or warrants.
4. What happens to my vested shares if I leave before my vesting schedule has ended?
Make sure you are clear what will happen with your vested shares if you leave before your vesting schedule ends. In particular, make sure the company doesn’t retain the right to buy back options at the exercise price, which would essentially erase the value of your vested shares.
5. How much is your option pool going to expand?
Even if your percentage of the company’s stock is satisfactory right now, make sure that your shares aren’t liable to get diluted over time by new financings. If it seems like the options pool is liable to rapidly increase, this may be a reason to think twice about jumping on stock options of your own.
6. Does this plan allow for cashless exercising?
Cashless exercising is a certainly an added bonus if you’re thinking about stock options. It basically allows for you to use the buildup in value of your option over time to exercise the option. As opposed to using cash to pay the exercise price, which is the more widespread policy.
7. What happens to my stock options if the company is acquired?
In some cases, the company you currently work for may allow you to accelerate your vesting schedule if the company is acquired. They may also offer extended vesting if you are laid off during the acquisition. Be clear about what would happen in this scenario so that you’re not stuck later down the line.
If you still have more questions, don’t hesitate to set a 30-minute meeting with your HR team. There is no such thing as a dumb question when it comes to compensation and finances. The most important thing is that you are as informed as possible to make the best decisions for yourself and your family.