Given the growing popularity of equity as a component of employee compensation, and its ability to make up a big part of pay packages, technologists not only need to negotiate equity as part of an initial offer, but also as part of annual reviews or promotions.
Tech companies are projected to pay employees over $40 billion in restricted stock units (RSUs) this year. However, If you were awarded RSUs as an incentive to join or stay with a company, their value may have plummeted due to recent market fluctuations, making your total compensation less than expected, noted Daniel Lee, director of financial planning at BrightPlan.
In the era of the Great Resignation, top performers may be able to score a higher salary, bonuses, more RSU grants, or a combination of all three to make up the shortfall. Here are some tips you can follow to make the most of equity compensation in the current environment.
Find Your Sweet Spot
Asking for “more of everything” when negotiating a job offer won’t work, cautioned Joshua Levy, CEO and co-founder of Holloway and author of “The Holloway Guide to Equity Compensation.” You need to figure out your priorities and focus your negotiations on that.
Understand how much risk you’re willing to take and how much guaranteed money or salary you need to cover living expenses (and be fairly compensated for your contributions). Also, maintain a realistic mindset about how long you plan to remain at the company.
“Have a total compensation goal and walk-away point in mind,” Levy advised. However, don’t let anyone force you into saying a number until you know the specifics about ownership percentages, valuation, and the benefits and drawbacks of various exercise scenarios, especially when negotiating with a startup. Levy provided some questions to ask startups to keep you from ending up with stock options that are worthless.
Lee agreed. “Overvaluing equity compensation is one of the biggest mistakes technologists make,” he warned.
Some recruiters will tell you the value of a company’s battered stock is bound to double over the next two to three years; they’re trying to get you to accept an offer that includes a large RSU grant. But you really need to calculate the best case, worst case and most likely return (as well as the tax implications) to prioritize and negotiate the best mix of cash and equity compensation.
Balance Risk and Reward
Another mistake that technologists make when negotiating equity is taking on too much risk in one company. For instance, if you agree to receive, say, 75 percent of your total compensation from equity, your risk losing it all if the company falls on hard times.
Don’t let the equity accumulate and become too large a part of your net worth. Sell some of the stock as it vests if the company is public, and reinvest in a diversified portfolio to grow your wealth more securely.
To avoid surprise taxes, it’s a good idea to have a lawyer review equity grants and employment agreements. Also, you need to start tax planning right away if you are facing a liquidity event, such as a buyout or merger, in the near future.
Watch the Details
The other things to consider when determining your ideal mix of salary and equity is the financial position of the company, the type of equity you’re being offered, and the competitiveness of the offer in relation to what other companies are offering.
The big question: Does the title or role match the job description? If you’re being hired as a lead software developer for a startup but will really be acting as a director or CTO, you need to be compensated accordingly or have an agreement to receive more equity down the road.
One of the best ways to tell what’s reasonable for a given startup role is to look at offers from companies with similar profiles on AngelList. To compare an equity offer from a public company, try using Blind’s salary comparison tool.
Remember to factor in some of the other intangibles that influence employee satisfaction, such as career development, your relationship with management or the opportunity to score milestone or longevity bonuses.
For example, if you believe in a startup and don’t need a lot of cash to cover daily living expenses, accepting stock options in lieu of salary might be your best bet. If the company succeeds in raising capital, the founders will probably “level set” your salary in a year or two and you’ll still have the potential for a big payout down the road.
Today, some 99 percent of tech companies grant time-based RSUs, and 61 percent grant performance-based RSUs. In fact, stock grants and stock options are more frequently used than base salary when it comes to employee retention.
“Companies tend to have more discretionary wiggle room on equity compared to salary,” Lee advised.
Top performers should compare their total comp to the market, and ask for an RSU grant as part of an annual review or promotion. The nice thing about RSUs is that they’re often worth at least something—unless the stock price drops to $0.