Stock (and stock options) is an important part of many technologists’ compensation packages. But for many, it’s an even trickier thing to negotiate than salary. What’s the best way to ensure that you’re given sufficient equity in exchange for your hard work?
First, it bears mentioning that not every firm gives equity. Not every company is publicly traded, or a startup willing to deed its pre-IPO employees a number of “shares.” If a company does offer stock, though, it’s worth taking several factors into account.
Stock Talk at Established Companies
With established companies, the amount of stock you earn is often determined by formula; if you stay long enough, and ascend up the rankings, you’ll rack up progressively higher stock payouts (and if you don’t, that’s a topic to discuss during your next annual review). Unless you’re aiming for a very big job (such as CTO), your total shares are collectively a very small drop in a really huge pool—and yet, over time, that tiny drop can add up to a lot of money. For that reason alone, if you’re applying for a job at a publicly-traded firm, it’s very important to bring up stock during the hiring process.
Let’s take a look at some of the biggest companies in tech and how they compensate entry-level software engineers in terms of stock; this data comes from levels.fyi, which crowdsources salary data:
Now let’s look at what these software engineers make once they hit a senior tier at their respective companies. As you can see, it’s clear that stock-based compensation becomes a much bigger part of the overall “mix” as employees climb the ranks:
Although a formula often decides stock payouts at bigger, public companies, there is some wiggle room. For example, if your latest project has proven a spectacular success, or if you’ve been given an enormous amount of new responsibility, that’s an opportunity you can leverage for a discussion about additional stock-based compensation.
The key during any such negotiations is focus. Larger companies often have a well-established pattern when it comes to upgrading employees’ compensation—for example, conversations are supposed to happen once a year at many firms, usually in conjunction with an annual review. If you “break the cycle” and head into your manager’s office demanding more stock and higher pay and some nifty perks such as a better employee parking spot, chances are you’ll be denied outright. “It’s not the right time of year,” your boss will say, and offer an apologetic smile.
Your chances of success improve, however, if you bear down on just the stock-compensation part of the equation, and leave the discussion of anything else to a later date. A big success on a recent project will solidify that you’re a long-term player at the company, and should be rewarded accordingly.
If your manager proves amenable to the request, they might offer you stock options instead of a big block of stock—and here’s where things get a little bit tricky. Stock options allow you to buy a certain number of company shares at a certain price, within a particular timeframe. For example, you might have options to buy 1,000 shares within the next five years at $5—which is a pretty good deal if the stock price hits $100 during that period. If the sock languishes at $1 throughout that period, though, you get nothing.
If you feel good about the company’s future prospects (i.e., that the stock price will continue to rise over the next several years), then options aren’t a bad way to go. However, there’s always the chance that the company’s fortunes could crash, and your options will expire before the price crawls above the “strike price” at which you can buy. Options also get a little bit complicated: There are non-qualified stock options (NQs), which differ from incentive stock options, and each can impact the taxes you pay.
Even with established companies, it’s probably a good idea not to have too much of your net worth tied up in your firm’s stock—just ask anyone who owned a lot of GE over the past decade. Those senior folks at Apple and other companies who’ve gotten very rich off stock benefitted from joining their firm during its spectacular market rise.
Stock Talk at Startups
Equity compensation in the context of pre-IPO startups is far trickier. Employees sign onto such companies, of course, because they hope that their 0.30 percent equity will eventually translate into many millions of dollars—provided the startup eventually goes public at some enormous evaluation.
Because many startups are really cash-strapped, they have a habit of paying out a big chunk of compensation in equity. And therein lies the dangerous opportunity: if you join the right company early enough, you could end up rich beyond your wildest dreams. But if the startup collapses, all your equity is vaporized. Folks at WeWork went from thinking an imminent IPO would make them rich to hoping they didn’t lose their jobs.
When considering a startup offer, take a look at its most recent valuation, and see how your offered equity matches up to the overall “pool.” If the startup is a long ways away from going public, there’s every chance that future investment rounds could dilute your equity’s worth.
With a startup, you’re taking a bet—but it’s important to make sure you’re being paid what you’re worth. Make sure that the cash salary sufficiently compensates you for your time and effort, especially since you never know whether the firm will survive.