If you got offered a job in tech, first of all — congrats! Your hard work is paying off. As you prepare to negotiate your salary and read the fine print of your offer letter, you might come across a benefit in your compensation package that you’re not familiar with: employee stock options.
Lots of companies will give employees “stock options,” or the right to purchase a number of shares of the company’s stock at a set price over a specific period of time. While stock options aren’t exclusive to tech companies, it’s a pretty common benefit at startups.
Equity compensation and stock options are a way for employees to have direct ownership in the company or “some skin in the game,” explains Danny Roberts, Senior Technical Recruiter at Codecademy. And since stock options typically vest over a period of time, it’s also a way to incentivize folks to stay at a company long term.
First things first: Stock options aren’t as straightforward as earning a salary or getting handed “free money.” You can expect your employer to give you a stock options agreement with all the terms laid out, and maybe even host informational sessions that illustrate some common scenarios. But you might still have questions about what all of this could mean for you.
Every company is different, and every employee’s financial situation is different, so it’s impossible to give one-size-fits all guidance. However, here are five things that will help you better understand this part of your compensation package, and hopefully guide your follow-up questions for a recruiter or financial advisor who can speak to your specific scenario.
What even is stock?
If stonks aren’t really your thing, it’s easy to get confused by the concept of equity packages and stock options. To review, a stock is a unit representing a fraction of ownership of a company. Stocks are mainly bought and sold on the stock exchange (like the New York Stock Exchange or Nasdaq); and in some cases, they can also be sold privately.
Whether you work for a publicly-traded company or a private one affects your stock options. When a company “goes public,” it means that it undertakes its initial public offering, aka “IPO,” by selling shares of stock to the public. Anyone can look up the stock prices of public companies (take a look at Meta, Apple, and Amazon’s stock quotes for context).
The value of an individual stock at any given time can fluctuate depending upon the stock market. When employees are given stock options, they’re offered at a fixed price that doesn’t change even as a company grows and gets more valuable.
Private companies that don’t trade shares on the public market yet, but want to offer stock options to employees, have to go through a formal appraisal process called a 409A valuation to determine the “fair market value” of a startup company’s common stock. The valuation can depend on lots of factors, like the company’s assets or cash flow, and companies do this annually (or sooner, if there’s a major event like a merger or financing).
A lot is hypothetical
The value of a stock is contingent upon so many other variables that are out of your control as an individual. “The main thing that people want to understand when they’re given an equity package and an offer is: What is the value of this?” Danny says. The truth is, at private or pre-IPO companies, it’s tricky to answer that question because it’s all hypothetical.
For example, say you’re considering a job at an early-stage pre-IPO startup, and your compensation package includes a number of stock grants. Technically, the value of the stock is all based on the 409A valuation, and you can’t trade it on the stock market yet.
In a sense, purchasing or exercising stock options involves betting on the future of the company. There’s a chance that there could be “an amazing upside” to buying stock, Danny says. If the company goes public and the stock becomes very valuable, that could result in a profit and windfall for stock owners. “But never think about equity as guaranteed,” he adds.
They’re time sensitive
Time is an important factor when it comes to stock options. Typically, employees have to work at a company for a set period of time before they’re allowed to exercise their right to purchase stocks. Stocks usually vest over a 4-year period with a 25%-year cliff, meaning each year you’re at the company, you can exercise 25% of the number of stock options you were granted.
Another common scenario: Your company gives you “restricted stock units” or RSUs, which are yours as soon as you vest, but don’t technically have a tangible value until a future date. (If the company is public, then the RSUs you’re granted each month do have a tangible value.) In order to reap the benefits, you’d have to stay at the company until the vesting period ends.
And should you decide to leave the company, there’s usually a 90-day window that you have to exercise your stock options.
There are tax implications
Keep in mind that whatever you decide to do with your stock options will impact your taxes. Make sure you know what type of stock that your employer offers so you know how it’ll be taxed: “Non-qualified stock options” get taxed as part of your annual income, whereas “incentive stock options” can get taxed at a different (in some cases lower) rate when you sell the stock.
Consider your personal risk profile
There’s a lot to take in here, and these are just some starting points for many more questions. So it’s wise to consult a professional financial advisor if you’re not sure what to do. What you do with your stock options is very personal, and boils down to how much risk you’re willing to assume. Someone who’s highly risk-averse might prioritize a higher salary with fewer stock options because it’s guaranteed money in the bank.
Stock options are just one exciting perk to look forward to in a new position. For more career advice, be sure to check out these tips for starting a remote position and strategies for drawing boundaries when you WFH. Still deep in the job hunt? Explore our career center for interview advice, portfolio prep, and more.