We’ve often raised our voices collectively on the gender pay gap at Lady Bird Talent, with good reason. It is completely unacceptable that in 2020, white women earned 84 cents to every dollar a man made for the same work, and women of color earned even less. However, the issue does not end there. There is also a gender equity gap that is just as troublesome.
In 2021, Carta analyzed the business equity ownership distribution by gender, race and ethnicity, and geography. The report broke down the four categories of corporate stakeholders: founders, senior executives, early employees, and technical employees. The study showed that for every dollar in equity a man owned, a woman-owned 47 cents. Also, even though women represented 35% of the equity holders in 2021, we only held 27% of the total equity because women were under-represented in founder and C-suite positions. Consequently, we were over-represented in the lower equity-holding positions. Frustrating, right? But fixable because with knowledge comes power.
At the first-ever Hire Women Week in May, we took steps to provide you with that knowledge. We hosted an Equity 101 workshop with Catherine New, Director of Content at Vested. Vested offers resources and tools that help you understand your equity offer and make the best decisions for your future.
Catherine has been on both sides of the equation as an employee and an employer, so she understands the questions, concerns, and confusion that often comes with evaluating offers, managing equity packages, and making funding decisions. Here’s a quick summary of her presentation.
The Basics of Equity
First, let’s start with some basic concepts and definitions. You should evaluate and understand these critical details before accepting any equity offer.
Equity is ownership. But stock options are not actual shares of ownership in a company.
Stock options are the ability to purchase shares at a set price, called a “strike price,” at a later date. The strike price will be per share but will not include taxes.
“Exercising your options” is the same as “Purchasing company shares.”
Most likely, you will be offered Incentive Stock Options (ISO). These are given to most full-time employees and are the most tax-efficient stock option. There are also Non-qualified Stock Options (NSO), often offered to consultants and advisors, and Restricted Stock Units (RSU) which are actual shares of ownership the receiver does not need to purchase. Both of the latter options have more advanced tax issues.
The strike price will not change as the company value changes, but the value of the shares will increase or decrease with the company value
The strike price at the earlier stages of your company will most likely be lower than the strike price offered as your company matures if the business is doing well. In essence, your employer compensates you for taking on more risk if you join the company as a startup. This can be a windfall or a shortfall. So, it’s essential to evaluate the company’s viability as best you can before accepting a “seed-stage” startup stock option package.
Vesting means the number of shares that are available to purchase at that time.
Until your shares are vested, the company reserves the right to “take back” your options. Vesting is the release of the take-back right and the start of your option to purchase.
A common stock option package in tech startups vests monthly over four years, after a one-year cliff.
For this schedule, none of your options will vest until you’ve worked at the company for at least one year. After that, a portion of them will be released monthly for four years. That doesn’t mean you have to purchase shares once they are vested. It’s best to choose the right time in context of your own finances for you to exercise your options.
If you leave your company, you will have a specific amount of time to exercise your options.
This is called your post-termination exercise window. In most cases, you have 90 days, but it could range from 30 days to 10 years. If you are scrambling to fund a purchase within your exercise window, you may be able to use option funding to cover the costs. Vested offers this service, if you need it.
Knowing how much of the company you will own if you exercise your options is critical.
As your employer raises money and matures, more shares will be issued, diluting your shares’ value. What was originally 25% of the company shares may become 10% very quickly. This will affect the value once the company goes public or your shares become monetized. Again, you should evaluate the growth potential of any company and negotiate for more shares if you think it will grow exponentially.
A potential employer may not disclose all of these vital details in their equity offer. So, please read the fine print, have an accountant and/or lawyer review it, and ask questions before accepting any offer.
Your Equity Journey
Let’s look at a simple timeline you may take as you evaluate, accept, manage, and exercise a typical equity offer.
Pre-employment
- Receive the offer
- Evaluate the offer
- Negotiate terms
- Accept the offer
Employment Day 1
- The clock starts on vesting.
Employment Day 365
- The one-year cliff is met.
- Your share options start vesting monthly.
Last day of employment
- The clock starts on the exercise window.
- Vesting stops. You will only be eligible to purchase the shares that vested during your employment.
Within the exercise window (typically 90 days)
- Find funding for the purchase, if necessary.
- Purchase available shares at strike price plus taxes.
You are now a shareholder in the company. If you have been offered an equity package at your new job, the timeline starts again for that company. No equity journey will be quite the same; it will depend on the company, your package, and the market.
Keep in mind that if your employer is not a publicly traded company, it may take years before any shares you purchase have a cash value. However, it is possible to sell your shares on the secondary market. If you are unsure, Vested can help you make this very important decision.
FAQs
Here are some answers to the questions the audience asked during this presentation.
Would there be any reason to exercise your vested shares while still employed at the company?
This is called progressive exercising, and it depends on the company. If the strike price of your shares is the same as the fair market value, you may reduce a tax bill by exercising your options while employed. It comes down to risk versus reward. Remember, when you exercise your shares before a company goes public, you are putting cash into something with no cash value at the moment, and you don’t know when it will.
What happens if the strike price is more than fair market value when the company goes public?
Your options are underwater. This is not ideal. In some instances, the company may reprice its options. You can also wait to see if the stock value increases. But in all cases, it’s essential to realize that accepting equity offers is part of the risk/reward scenario of working for a startup. Stock options are not a guarantee of actual money in your pocket.
Who determines the fair market value of NSOs if they are exercised before a company goes public?
Every company receives an annual 409A valuation through a third-party company. This valuation determines a share price or fair market value (FMV). It can be tricky to find out the FMV before you exercise any options, but your employer must reveal the FMV when you decide to exercise your options. In terms of planning, check Carta or the platform the certificate is issued from or ask your HR department some straightforward questions.
What happens to my stock options when a company is bought out?
Lots of different things could happen. Here are just a couple of them:
- The acquiring company could write you a check for all of your shares (if you are past the cliff, typically one year of employment).
- The acquiring company might convert your existing shares into their company shares.
- Your common shares could become worthless; in other words, they have no cash value.
There is nothing much you can do in this situation unless you are in the C-suite. When evaluating any equity offer, keep in mind the industry’s future, the company’s health, the leadership philosophy, and the possibility of acquisition.
Still Unsure?
Vested calculated that $600 billion in equity had been abandoned by employees not exercising their options because they don’t understand how options work or feel they don’t have the money to leverage their offers. That is a lot of money we are leaving on the table!
But this doesn’t have to happen to you. There are resources to educate and inform you. Vested offers Equity 101 education on its website for more information on terms and definitions. We’ve also written a comprehensive blog on evaluating an equity offer. You can also follow Vested.co on Linkedin for more information and other educational events.
Catherine’s parting words for her presentation were clear. In any equity offer negotiation, she advises asking for more. All they can say is no. You are worth it!
