This week’s blog post is from Liz, the voice behind Liz Gets Loaded, a podcast and Instagram account that’s a personal financial journal.
Liz is an elder millennial in a dual income, no kids household. She’s been saying she wants to retire in 5 years for about 3 years now.
I usually avoid taking any advice from co-workers, but if you work with Liz, she’d be the exception. During her career, she has accumulated some impressive real-life experience dealing with equity compensation in high-earning roles.
Liz has amassed over 16,000 followers on Instagram and is approaching 100,000 downloads on the Liz Gets Loaded podcast.
Liz, take the mic!🎤
I have had multiple jobs with equity compensation, and the one thing I have learned is that no two equity compensation plans are the same. And often I find when I talk to people, they assume whatever they’ve seen at previous jobs is normal/typical/standard.
There are two main kinds of equity compensation:
RSUs, Restricted Stock Units: The company gives you shares of the company! For example, you might get a grant of $40,000 in RSUs. Usually you’ll receive these across several years as they “vest.”
Stock Options: Your company is giving you the option to buy its shares at a price that is set now, called a strike price. These only have value if the price of a share in the company goes up. For example if you have 10,000 options and the strike price is $2 per share, if the value of shares in the future goes up to $5 per share, that’s great for you! You could pay $20,000 to exercise your options and end up with $50,000 worth of stock in the company.
Today I want to talk about stock options.
They’re really common at early stage companies, and I find there’s a lot of confusion about how they work.
I absolutely love Carta’s free equity 101 course. You can learn all the basics of equity compensation in about an hour, and faster if you watch it sped up!
But when you’re starting a new job or at a company that’s rolling out stock options for the first time, here are the questions I would ask.
Am I getting NSOs or ISOs?
Generally ISOs get a more favorable tax treatment. This isn’t something you can negotiate; you just get what the company decides, but it comes in handy to know when thinking about these in the future. You’ll likely see this listed in your offer or other docs, but if not make sure to ask.
What’s my vesting schedule?
Vesting is just a fancy word for when your options actually become yours. The most common vesting schedule is four years with a one year cliff. Let’s say your company grants you 10,000 options. The most common scenario is 2,500 of those options become yours (so they’re vested) after one year, and the remaining 7,500 vest a little each month over the next 3 years.
It’s worth asking though! Your vesting schedule might be longer, or there may be events that trigger vesting. There are about a zillion ways to structure vesting schedules.
What happens if we go public/get acquired/have another event?
Early in my career I had a friend who’s company got acquired by a big tech company. “When you get acquired,” he explained to me, “all of your options vest right away.” And what he didn’t know, and what I didn’t know, is that sometimes when your company gets acquired, all of your options will vest right away. But it’s not always the case.
When you get acquired, your options might fully vest, or they might not. (It depends on what’s in your original option agreement.) You might get cashed out, meaning you get paid a lump sum of the difference between your strike price and the purchase price. Your options might be replaced with new options from the new company.
You might have your options canceled if they’re “underwater.” That means the current share price is less than your strike price. For example, if your strike price is $2 per share but your company is acquired at a price of $1 per share, there’s no value and you probably just get nothing.
What’s our current 409A?
A 409A is a financial document that estimates the value of the company and estimates the current share value.
If you’re being offered options with a $2 strike price and the current 409A has the share price at $3? Amazing! Your options are likely already in the money. It’s common for new grants to be issued at the most recent 409A valuation, so don’t be surprised if they’re pretty close. If the 409A is lower than your strike price, that means there may be a ways to go before your options have value.
Does the company do refresher grants? Can I earn more grants down the road?
Depending on the company, you might get another grant annually when your compensation is reviewed or if and when you get promoted. That can definitely be a good thing! And it can be a tricky thing emotionally. If you’re getting a new grant every year with a 4 year vesting period, it can be really hard to walk away from a job without feeling like you’re leaving money on the table.
Tell me about the PTEP (Post-termination Exercise Period)
This is a crucial and often overlooked piece! If you exit the company, voluntarily or involuntarily, what happens to your options?
The most common scenario is that you have a window where you can buy them. Going back to our example a 10,000 option grant with a strike price of $2 and a 4 year vesting schedule. If you work at the company for 2 years and then you quit, you will have vested 5,000 options, and if you want to keep those options, that probably means you have to pay about $10,000 to exercise them. Then you’d own 5,000 shares of the company, and you hope that when the company goes public or has another event where you can sell your shares and realize their value.
It’s pretty common that you’ll have to make a decision pretty quickly, within 90 days or less! But some companies will give you longer. This can be awkward to ask about. You don’t want to make it sound like you’re already thinking about leaving, but make sure you understand how this works.
Some other things that can happen? You may not have the option to exercise your options (i.e., to buy them). If you’re terminated from your job for cause, there may be a clause in your agreement that says you forfeit all of your options in that case.
Don’t be afraid to ask questions
Equity compensation is part of your paycheck! There’s absolutely nothing embarrassing about wanting to know how your compensation works. Ask your HR team, a savvy coworker, or a fee-only financial planner who might give you more candid/plain language answers. I assume my stock options won’t be worth anything, but I’m also ready with all the info I need just in case they are.
The opinions voiced in this material are for general information only and are not intended to provide specific advice (tax, investment, or otherwise) or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.