If you are employed in a startup or the tech industry, chances are you have been granted options or restricted stock units (RSUs) as part of your compensation package. Offering stock benefits is a common practice in the technology and life sciences sectors, with equity playing a significant role in an employee’s total rewards package. However, determining the value of these stock benefits can be challenging, especially for companies that have not yet gone public.
Gianna Driver, Chief Human Resources Officer at Exabeam, explains that while the value of stock benefits is clear for publicly traded companies, it becomes more of an “art than science” for non-public companies. In these cases, the current value of stock benefits is hypothetical and technically worth nothing. However, receiving equity instead of cash presents both risks and rewards, as highlighted by Daniel Lee, Director of Financial Planning at BrightPlan. Lee emphasizes that equity has been the driving force behind many instant millionaires resulting from initial public offerings (IPOs).
Startups often offer stock benefits to new hires in place of high cash salaries. The hope is that as the company’s value and share price increase, employees can profit from selling their stock options at a higher market value than their strike price. Although equity in a company involves higher risk, the potential for significant rewards exists.
When evaluating a compensation package with stock options, it is crucial to ask specific questions to determine whether it is a promising opportunity or a red flag. First, understanding whether you are being offered stock options or RSUs is essential. RSUs are the most common type of equity award, while stock options provide the option to purchase stock at a predetermined price in the future. Another critical factor to consider is whether the salary offer meets your market value, as it is unwise to sacrifice a significant portion of your income for stock benefits. Long-term commitment to the company is also vital, as stock options and RSUs often vest over several years.
Lastly, it is important to assess the current and potential future value of the stock. Private companies should provide a 409A evaluation, which determines the fair market value of the stock. This evaluation is crucial in understanding the worth of the stock benefits being offered.
Overall, evaluating stock benefits requires careful consideration of various factors, including the type of equity, salary offer, future plans with the company, and the current and potential value of the stock. By asking the right questions and conducting thorough assessments, individuals can make informed decisions regarding their compensation packages.
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