ISO. 439A. AMT. 83B. Understanding equity can seem at first like deciphering a code. It’s one of the most confusing and opaque aspects of compensation at tech companies, so is often neglected. I speak from experience. I was lazy about understanding my own equity’s fine points, and it eventually caught up with me.
When I joined a startup, I had not worked at a private company with stock options before. When negotiating my compensation, I gave a half-hearted attempt to assess the stock option grant, but there were some complicating factors and I hit a couple of roadblocks. So I put the task aside, thinking it didn’t really matter. At least not in the short term. But ultimately, it did.
I am not alone. According to Carta, more than 60% of equities go unexercised. Of course, there may be other contributing factors, but one most certainly is that many employees do not understand the equity portion of their offer, and then do not maximize what they have.
Happily, there are excellent new resources to educate employees. Also, in a tight talent market, more companies are committed to transparency and are adding features to help employees make best use of their equity. These are welcome trends.
Simple resources that break it down
Where should you begin your quest to understand stock options? A good place to start is with equity management company Carta, which recently launched an education initiative. The company’s goal is to impact 100,000 employees. (You can tap into some of these resources here.) I attended Carta’s first webinar on the topic, and I found it a super-easy way to learn the basics. The 40-minute session included segments on option grants, vesting, exercising, selling, and taxes. Company experts laid out the need-to-know information in each category, with simple (but not insulting!) graphics.
One of the most useful aspects of the webinar was the wrap-up where each speaker shared one key takeaway. The points they emphasized were:
- Don’t neglect to execute your option grant agreement immediately upon hire. It may seem like just one more bit of paperwork, but if you don’t complete this, you will lose your options.
- As you do this, be sure to actually read and understand the grant agreement. The terms included in the grant will guide a number of your employment decisions going forward.
- When evaluating a job offer, don’t be afraid to ask about opportunities to sell shares without the company being acquired or an IPO. A growing trend is for companies to offer interim opportunities for employees to sell shares back to the company or on a secondary market. That means you may be able to cash out shares without waiting years for an IPO, which is attractive.
A word on taxes. At the beginning of your equity journey, paying taxes may seem like an event in the far future, nothing you need to concern yourself with now. This is not true. Taxes are a very important factor in understanding the net value of your shares if you exercise, but taxes can also be a factor in thinking about the value of the compensation package being offered to you pre-employment. For example, are you being offered ISOs, NSOs or RSUs? There are major tax implications in the differences, which you will need to know about when negotiating your compensation.
Another excellent resource for equity education is Holloway, which publishes deep content (aka books) on issues relevant to tech work. Holloway’s guide is a little deeper than Carta’s, an 80-page ebook. So if you learn best through reading and want to dig deeper into topics, you should check it out. Also, a table of contents down the left sidebar is a quick way to click around to the topics you need particular information on. You’ll need to sign up for a free account first, but the book is also free. Like all Holloway publications, it’s especially user-friendly when it comes to format.
Calculating equity value
Finally, in considering a job offer, you’ll want to calculate the value of the equity being offered to you. The salary number in a job offer is relatively easy to evaluate, but a number of factors make equity value less clear. Similarly, later in your journey—such as when you’re leaving a company and are considering exercising your options—you may want to know the value of what you’ve earned.
Happily, there are online calculators that will help you put a number on this. I particularly like these:
Vested applies data science to give some context to the figure, with comparisons to similar roles in other companies.
Carta’s downloadable calculator (a spreadsheet) is a little more complex but allows you to compare two companies’ offers. The accompanying blog post is a pretty clear guide on what you need to know in evaluating.
Front reviews your entire package and was built to demonstrate the company’s commitment to transparency for its own employees.
Pie Compensation is mission-driven and offers pay-what-you-can (including $0) compensation reviews.
Yes, equity can be tough to decipher. But the good news is that the learning curve is not insurmountable. I got over the hump, under duration, when I left the startup I worked for. Do I wish I had invested in this education earlier? Yes. I would have made a few different decisions. But if I can do it, so can you. It’s an important investment in your financial future.