10 Things to Know About Stock Options When Evaluating a Job Offer
It’s important when you’re looking for a new job that you consider all your options for the most favorable offer – especially when it comes to stock offers. Nothing can impact your financial future more than the possibility of having equity in a company with great financial success. However, a lot of people don’t fully understand the ins and outs of stock offers. If you’re considering an offer from a prospective employer, there are a few important considerations you need to know before agreeing to their terms.
Percentages of stock options are an incredibly important. When dealing with options more is always better than less, but the most important issue is the percentage of ownership you’ve got in your company.
For example, if your potential employer offers 100,000 options out of 100 million shares outstanding and another company offers you 10,000 options out of 1 million shares outstanding, the second company offers much more in terms of ownership.
All jobs offered to you have both a market rate for salary as they do for equity. Your market rate usually is determined by:
- Your job’s functions
- Your level of seniority
- Your potential employer’s location
- Your potential employer’s amount of employees
You are always entitled to ask your prospective employer for the market rate you believe is appropriate for your prospective position.
Usually, a proposed employee’s vesting schedule is over four years and carries a one year cliff. If you left your employment before the one year cliff was satisfied, you get nothing. After that time period has passed, you immediately vest 25% of your shares and your options will begin vesting on a monthly basis.
Exercising Your Options
Most potential employers mandate you exercise any stock options you have no more than 90 days from ceasing employment there. This can become a tricky subject, because the number of shares you’ve vested and the price per share for your options could end up being a large amount of money if you’ve been with the company for a long while.
Can I Keep My Vested Shares If I Leave?
Under the terms of most employment agreements, you can usually keep all the stock options you have vested if you exercise your rights in under 90 days of leaving your employer. In some cases (which you should be looking for) the company may have the option to repurchase all your stock options at the exercise price. This only happens if a liquidity event, such as a public offering or a sale, happens. That means that is you and a company part ways after a few years, you may be left with stock options that are worth nothing.
Exercising Your Stock Options Early
Some companies do allow their employees to exercise agreed-upon stock opens early. Doing so before the employee’s options have vested can benefit employees when it comes to taxes – they’ve got the chance to have any stock option gains taxed at rates for long-term capital gains instead of traditional, higher rates potentially saving you a lot of money.
Accelerated Vesting of Stock Options
If you are considering working for a company that could be acquired in the near future, you may be faced with the possibility of something known as an accelerated vesting option. Some companies will offer an additional six months of vesting if they are acquired and you are terminated after the fact, as can be very common. Though accelerated vesting can be an attractive option, the reality is that the acquiring company may offer a lower buying price because it might need to compensate people who might be forced out or might need additional options to entice them to accept an offer of employment.
Common Stock Appraisal Dates
The board of directors of companies are the bodies that issue stock options to employees, so you may not be certain of the option prices included in your offer letter before the most recently scheduled board meeting occurs. If you’ve been offered employment and stock options by a private company, your company’s board of directors must set an exercise price for your stock options based on what is known as a 409A appraisal under the federal tax code. If a significant amount of time has passed between your most recent appraisal and your departure from the company, the company may be required to do another appraisal; this means your options may be less valuable.
Value of the Company
If you’re given stock options from a potential employer, it’s important that you consider the company before accepting what’s presented to you. Established public companies and private, start-up companies may have very different upsides and downsides. You should ask your potential employer about their belief of what the company’s worth will be years down the road (specifically, the time frame your stock options will vest) and talk to current employees about their experience and thoughts if you can.
Follow-On Stock Option Grants
Though many companies will offer stock option plans in their employment offers to prospective workers, some companies will provide the option of additional stock issuances to their employees after they’ve begun work. These can be offered as either alternatives to promotion, a way to reward exceptional performance, or as a way to keep you interested in staying with the company if you’re a long way into your stock options vesting.
Speak to a Employment Lawyer Today
When considering a job offer, it’s understandable you may be overwhelmed with all the considerations and terms proposed by a potential employer. To make sure you’re protected and putting yourself in the best situation possible, consider contacting an experienced employment attorneys.
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