Once you have received a job offer, that’s when the real negotiations begin. Requesting a higher salary and sign-on bonus is the easy part of the process. Figuring out how to secure the most beneficial equity compensation package is a bit more complicated.
The life stage of the company and the position you are applying for will determine the type and size of your equity grant offer.
Let’s examine the most common types of equity grants first so you can understand how to use any equity grants that you leave behind at your former employer as the basis for negotiations for new equity.
What are the most common equity awards?
A stock option grant gives you the right to buy company stock at a certain price (the grant price) beginning on a certain date in the future. After your stock options vest, you have the option of exercising the options at the grant price. There are two different types of options—nonqualified and incentive. The main difference lies in the way they are taxed.
Restricted Stock Units/Restricted Stock
Restricted stock units (RSUs) and restricted stock represent a transfer of company stock from the employer to an employee, based on a vesting schedule. When RSUs vest, the value of the grants is taxed as ordinary income. Therefore, knowing your vesting schedule allows you to estimate your future income and tax liabilities. RSUs are basically a bookkeeping entry until the grants vest, while restricted stock offers immediate ownership at the time of the grant.
Performance shares are usually not granted up front, but rather as part of a long-term incentive plan (LTIP). Performance shares are typically tied to meeting a specific future goal, such as a profit target or total shareholder return relative to the stock market. They are very similar to RSUs in their structure.
How to estimate a compensation package?
To calculate the value of the equity compensation package you are leaving behind, you need to calculate the forfeit value of your equity grants.
To do this, you’ll first need to take inventory of your vested and unvested grants. Many people make the mistake of assuming that the amount of unvested options and RSUs is what they are leaving behind, when in reality the value is often much higher.
You should also consider the time value of your vested options. This includes the full option value of your current unvested options, as well as the intrinsic value of your restricted shares. In most cases, the actual forfeit value of the equity you leave behind is considerably higher than just unvested grants.
Because these calculations can get very technical, you may want to seek help from a professional to help you maximize these benefits. As part of this process, first take the time to define and prioritize your life goals. If you align your financial planning decisions with your priotrities, making decisions about a new offer and equity grants will be easier.
Always remember that equity grants can be a lucrative way to increase your net worth and help you achieve your financial goals. However, as the past couple of years have demonstrated, stock market volatility can affect the value of your equity grants and your ability to meet your financial goals.
To summarize, consider these steps before you accept a new job offer and negotiate your compensation package:
- Consider your current financial situation and establish clear short-and long-term goals.
- Use your current benefits as the basis for compensation negotiations, taking into consideration the entire forfeit value of your existing benefits.
- Consider the impact of taxes and consult with a financial advisor and employment attorney to help you negotiate more effectively. This will help ensure your negotiate the best possible compensation package that you can get.
To learn more about what is negotiable, who can negotiate, and when to negotiate, please refer to our MassBio.org featured article Switching Jobs? Learn How to Negotiate The Best Possible Compensation Package