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Valuing Stock Options in Job Offers

Dear Anonymous,

Congratulations on the job offer and the equity package that comes with it!

Let’s break down your questions one at a time. First up, when you look at your job offer, does it really make sense to accept a lower salary in exchange for stock options, given the risks, tax rules, and potential upside?

Startups offer stock options to employees as a way to align incentives and reward them for helping grow the company. When a startup cannot match cash compensation from larger employers, it may use stock options to offer potential future upside if the company eventually goes public or is acquired at a meaningful valuation.

In general, I urge people to negotiate during the offer stage so the full compensation package, including salary, bonus, and equity, makes sense for everyone involved. In your negotiations, focus on your personal risk threshold: are you comfortable trading some cash salary today for the potential upside of stock options or RSUs in a future liquidity event, or do you need a specific level of guaranteed salary to cover your ongoing expenses and future tax obligations on equity, such as possible AMT exposure on ISOs?

Unfortunately, your second question does not have a clear-cut answer. Every acquisition plays out differently, and what your equity is worth in that scenario will depend on the specific deal terms that your company and the acquiring company negotiate at that time, including how common stock and stock options are treated in the final agreement.

I’ve seen acquisitions where there’s an accelerated stock option vesting schedule (and acquisitions where there wasn’t), acquisitions where the acquiring company paid cash for exercised stock options, and others where they offered a stock swap, converting shares from the old company into the new company. Some acquisitions offer a mix of cash and stock, or new grants of stock options that are tied to performance goals being met.

It really depends on what happens at the negotiating table if/when an acquisition occurs.

- Vieje Piauwasdy, Director of Equity Strategy at Secfi

Have a question about your stock options or equity offer? Email us at ask@secfi.com