When taking a job, the compensation packages often include salary and other benefits like health insurance. In tech, stocks are a vital part of compensation packages. But, despite how important it is, it’s an even trickier thing to negotiate than salary for many people. The reason is that you want to ensure that you’re given sufficient equity for your hard work.
Many start-ups are cash-strapped. As a result, founders often use equity to lure talent and compensate employees for the lower salary paid at start-ups. Founders also use equity as a tool to keep employees motivated with the prospect of a big payday when the company is eventually sold or goes public. Whereas, in established companies, the amount of stock earned by employees is often determined by a formula. As you ascend the rankings, you’ll progressively receive higher stock pay-outs. Therefore, while applying for a job at a publicly traded firm, it’s essential to bring up stock during the hiring process.
Equity given to employees is often in the form of stock options, but sometimes stock is offered. Stock options are contracts giving the buyer the right, but not the obligation, to buy or sell the stock at a specific price on or before a certain date.
Owning equity at a start-up can be a risky opportunity. The risk lies in if the start-up collapses, all your equity is vaporized. On the other hand, if the company succeeds, you may also become wealthy. By taking equity as compensation from a start-up, you’re making a big bet, ensuring that your entire net worth is not tied up to a single company. It is also essential to make sure you’re being paid what you’re worth.
Here are some essential factors you must keep in mind when negotiating stock options.
There may never be a big payday
A large number of start-ups fail. Research puts the rate of failure to almost 90%. It is possible that the startup you join will never reach a liquidity event, and you may end up with nothing. That is a business risk associated with start-ups. Therefore at start-ups, you should negotiate for equity to know that it is not worth anything yet. It only might be worth something in the future. Don’t short-change yourself when negotiating a salary because that money is what you need to live on in the present. The equity offered by more prominent and well-established companies may not have similar risks.
Consider the valuation of the start-up
When considering an offer from a start-up, take a look at their most recent valuation to see if the equity offered to you matches up to their maturity. If the start-up is far away from going public, there’s every chance that future investment rounds could dilute your equity’s worth.
Do your research
When it comes to money, you should not believe everything you are told, hook, line, and sinker. It is advisable to verify by conducting your research. Knowledge is power, and you can advocate for your professional well-being more effectively with data. Find out what people in a similar position in similar firms are being offered. Ensure you are not getting less when you can get more.
Ask for time to decide whether to accept
Do not rush! When you hear the equity offered, you might feel compelled to accept it immediately out of gratitude or relief. This is not advisable! Ask for some time to think about the offer. Money decisions are too important to be made on impulse.
Understand the terms and conditions of the kind of equity you get
All shares may not be equal. For example, the equity often offered to employees is called common stock. In addition, there may be different levels of shares in some companies that are provided to higher-level managers, founders, co-founders, or early employees. These are often referred to as preference shares. No matter what kind of equity you are offered, make sure that you fully understand the terms and conditions.
Get legal advice
Get a good lawyer to look over your compensation package after you ask for equity. This is important because people may be dishonest and may sometimes make honest mistakes. In other instances, the legal jargon used may be confusing. You are advised to sign only what you understand. Getting professional advice will help to reduce the risks associated with signing documents.
If you think you can get more, know that you can always make a counteroffer. You could also frame your negotiation as another skill you bring to the table, which just might impress the person who is about to hire you. You can make a statement to let the recruiter know that you always seek the best deal. This may cause a lasting first impression on the mind of the person hiring you.