Evaluating and Negotiating Job Offers
Part 3 – Stock Options

(This is part 3 of the series on Evaluating and Negotiating Job Offers. You may also find these other parts of interest: Part1: Base Salary, Part2: Signing Bonus & Relocation Benefits, Part4: 401K, Part5: ESPP, Part6: Other Perks).

The next aspect we look at is the Stock Options.

What are stock options?
This is one of the additional perks an employer might offer you as part of your package. It is the option to let you buy a certain number of shares of the company at a pre-determined price, that you can exercise at a later date. The pre-determined price, called the "strike price" or the "grant price", is usually the price of the shares on the day it was granted (generally, the day you join). For example, a company may offer you an option to buy 1000 shares and on the day you join the price is $5. Then the "strike price" of the shares is $5. Five years down the line, say you want to exercise your options. On that day, say the price of the share is $55. Then, you make a profit of $50 per share, and if you exercise all your options, you will pocket $50,000.

Setting your expectations:
I know that stock options are fairly common for jobs in the tech industry. I am not sure if other type jobs offer options. During the dot com boom days, it seemed like the only way the price of shares can go, is up. So, employer used the options to entice prospective employees. But now, not many companies, even in the tech industry, offer stock options since they are not so attractive anymore. So, set your expectations according to the job you are applying for.

The Gotchas:
Stock options are usually granted with a vesting schedule, typically spread over 4 to 5 years. Until they vest you will not be able to sell them. Thus, if you are offered 1000 shares with 25% vesting every year, then at the end of first year you can own/sell 250 shares, at the end of the second year you can own/sell another 250 shares and so on. If you leave the company before all your shares are vested, you forfeit any portion of the options that have not yet vested. If you are offered stock options, make sure to ask about the vesting schedule.

Also, remember, stock options are a bit of a gamble. When the shares eventually vest, if the price is not higher than your strike price, you will not be able to make any money from your options. So, do not count your chicken before the eggs hatch.

Unless there is a high probability that the company you join is bound to do well a few years down the line (say, you were evaluating an offer from google two years ago), you should not focus too much on negotiating for stock options. If the company gives you some options, great, take it. If not, focus your negotiation efforts on other aspects of the offer that are less risky. Better to have a bird in hand, than two in the bush.

In the next post we will look at 401K / pension plan. This will be followed by discussion of ESPP, annual bonus, insurance benefits, paid vacation and other perks. Stay tuned.

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