New year, new job offer: how to understand your stock package

Congratulations, you have received a job offer that includes stock compensation. Getting an equity grant is always exciting, but before you spend any money, you need to understand what you’re actually getting. Too many applicants accept stock packages without asking the right questions, only to find out later that their “valuable” stock grant isn’t really worth what they thought.

When job seekers truly understand their equity compensation – including the award mechanisms and realistic valuation scenarios – they make better decisions and join companies with the right expectations. This benefits everyone: new employees, recruiters and hiring managers.

With this in mind, Pavementa compensation intelligence platform used by more than 8,600 companies, shares five key things you need to know about any stock award before you sign on the dotted line.

What type of stock reward do I get?

Each equity instrument or stock type works in unique ways and has different financial implications for employees. This story focuses on the two most common compensation vehicles: stock options and restricted stock units (RSUs).

Stock options, most commonly used in early-stage private companies, give you the right to purchase company stock in the future at a fixed price (i.e., the “strike price”) once certain vesting requirements are met. However, these rewards may lose their value if the company’s stock price falls below the strike price.

Meanwhile, RSUs, which are most commonly used among private and late-stage public companies, represent shares of stock in the company that you receive once certain vesting requirements are met. RSUs always have some value as long as the company remains active.

Digging a little deeper, there are also different types of stock options to consider, which have specific tax implications. Incentive stock options (ISOs) offer employees preferential tax treatment, but they come with certain limitations. Non-qualified stock options (NQSOs), on the other hand, are more flexible but create ordinary income taxes when exercised. RSUs are taxed as ordinary income when they vest, even if the shares are not sold.

Understanding the type of stock compensation you will receive can help you set realistic expectations and plan for taxable events. Don’t assume that all stock rewards work the same, and it’s always wise to consult a tax professional before receiving or selling stock.

The vesting schedule of your stock award determines when you will actually receive your shares. When stock options vest, you have the right to exercise your options and acquire shares, and when RSUs vest, you immediately become a shareholder.

Fortress schemes vary widely. At private technology companies, awards are typically for a total vesting period of four years, with the shares being earned at varying intervals over that period. At public technology companies, the number of awards increases with a three-year vesting period.

Pay particular attention to so-called ‘cliff vesting’ events in your compensation, as they pose a significant financial risk if you leave your job or are terminated prematurely. One-year cliffs are very common for new employees, meaning no equity is acquired (or earned) during your first full year of employment. Then, on the one-year anniversary of your fair, a big vest takes place. After that, most awards switch to what’s called “linear vesting,” where a small portion of your stock award vests each month or quarter for the remainder of the total vesting period.

How is the value of my stock reward determined?

For publicly traded companies, determining the value of stock is simple: All shares you receive, whether you exercised stock options or earned RSUs, are worth the current stock price. For private companies, however, it is more complex and speculative.

Private companies typically use 409A valuations to establish fair market values ​​for their shares, but these may be conservative estimates that may not reflect the company’s true potential – or current investor interest. In the long run, the number of shares you receive as a percentage of the company’s total outstanding shares says much more about the potential value you could receive.

Always remember that the value of stock in private companies is largely theoretical until there is a tender offer or exit event (e.g. IPO or acquisition). A million shares means nothing if the company never leaves, and even a successful exit doesn’t guarantee value for common shareholders if liquidation preferences favor investors. The bottom line: It’s important to ask questions and look for companies that communicate transparently about their risk-reward profile.

What is the long-term outlook for My Equity Award?

In general, the share capital of publicly traded companies is considered more stable and less risky. You will always know that the daily share price and quarterly earnings reports provide transparent advice on the company’s performance and direction. While you can’t predict the future, you do have good information to help you assess the level of risk associated with your stock rewards.

For private companies, this question touches on a company’s exit timeline and growth expectations. Are you joining a company that expects an IPO in two years, or a company that plans to remain private indefinitely? Is management optimistic about tenfold growth, or is it focused on steady, profitable expansion?

Companies with shorter exit timelines and aggressive growth targets offer higher potential returns, but also higher risk. Those planning for long-term private growth may offer greater stability but potentially limited liquidity options.

Understanding management’s honest assessment of exit timelines, growth potential and business strategy will help you assess whether the equity component of your compensation aligns with your personal financial goals and risk tolerance.

Employees can be surprised here.

Standard stock award agreements generally favor the company; Typically, you will lose all unvested assets immediately upon termination, whether voluntary or involuntary. And for vested stock options, you typically have 90 days to exercise after you exit, which can cause significant financial strain if exercise costs are high. Some companies offer longer exercise periods (10 years is becoming more common among well-funded startups), but this remains the exception rather than the rule.

Pay special attention to acceleration clauses, which determine whether your unvested shares accelerate the vesting schedule in certain scenarios.

Single-trigger acceleration means that your wealth accelerates based on one event, usually a company acquisition or change in control. If your offer includes single-trigger acceleration and the company is acquired in the second year, you may be able to immediately acquire all four years of equity. This is rare and usually only reserved for executives.

For a double trigger acceleration, two events must occur: a company acquisition AND your termination (usually within 12-18 months of the acquisition). This protects you if you are fired after an acquisition, but ensures that you remain incentivized to stay and help integrate the companies. Double trigger acceleration is more common and often considered a fair middle ground.

Also understand any repurchase rights the company may have on your acquired shares, especially with private companies. Some companies retain the right to buy back your shares at fair market value if you leave, which may limit your ability to benefit from future appreciation.

Finally, note the difference in treatment based on how your employment ends: termination for cause, resignation, or dismissal can all have different effects on your assets, including accelerated forfeiture or shorter practice periods.

All of these features are rarely negotiable except for executives, but it’s still good to ask questions so you understand the terms of the agreement and can manage your expectations.

The best companies provide detailed equity documentation in advance and are transparent about reward valuation, terms and conditions and realistic results. Red flags include vague answers about basic terms and conditions, refusal to provide documentation, or pressure to accept quickly without time for review.

Companies must be prepared to clearly explain their equity programs. If you can’t get straight answers to these five questions, it could tell you something important about the organization’s culture and transparency.

Equity compensation can be a great way to create wealth, but it can also be disappointing. The difference often comes down to understanding what you’re getting before you commit. If you understand the terms, timeline, and possible outcomes, equity can be a powerful way to participate in the success of the businesses you help build.

Don’t let excitement about a new opportunity keep you from asking these important questions. The companies worth joining will respect your dedication and provide clear, honest answers.

This story was produced by Pavement and reviewed and distributed by Stacker.

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