5 Things I Wish I Knew About Stock Options Before I Signed My Employment Contract
After I finished my PhD, I got a job referral from a friend for a position at a new start-up.
The premise of the start-up was right in my field of expertise and the other scientists working at the company were amazing.
I got called in for an interview and I was so nervous.
Did I have what it took to work at the start-up?
Was I good enough?
Imposter Syndrome was killing me.
But, I had prepared for the interview and, despite my nerves, I managed to make a good impression.
About a week later, I had an offer!
And, while this was very exciting, I was a bit disappointed when I read the offer.
The salary was less than I was hoping it would be.
I went back to the company and asked what more they could do.
They acted surprised by my response and asked if I had looked at the stock options offered in the contract.
I’d read over that part of the contact, but didn’t really understand.
The employer told me that those stock options meant that once the company went public, I would make A LOT of money.
I believed him and accepted the offer.
The work I did at this company was fun and exciting — but the company wasn’t doing well.
And, after 2 years, the company shut down.
I asked about my stock options, but I knew the answer.
No matter how much stock you own, if the value of the company is zero, the value of your stock is zero.
It was a disappointment and learning opportunity.
When I got my next industry employment contract, I asked the company to explain every section of it to me in detail.
I asked lots of questions.
They didn’t seem upset about my thoroughness and, after the conversation, I was comfortable signing the offer.
Why Stock Options And Benefits Packages Are Important
The way you will be paid for your work is very different in industry than it is in academia.
The biggest difference is that you will make so much more money in industry.
According to Glassdoor, in San Diego, an industry research scientist will make (on average) $41,000 more per year than a postdoc.
41,000 extra dollars.
In industry, they value your time and contribution more than in academia.
But, they also offer you even more ways to earn money.
Many companies offer employees stock options.
This allows employees to own part of the company.
So, when the company grows and becomes more valuable, everybody wins.
The Society for Human Resource Management reported that approximately 9 million employees hold stock options.
These stock options can result in thousands of dollars of extra wealth for you.
But, in order to make the most of the opportunity to invest in the company you work for, you need to have a basic understanding of how it all works.
5 Things I Wish I Knew About Stock Options Before I Signed My Employment Contract
As a PhD, you can dissect a 12-page paper filled with academic jargon.
You can summarize this paper for someone who has no technical background.
But, reading through your employment contract probably feels like reading a foreign language.
It’s a whole new technical language that most PhDs have not been introduced to — it’s confusing.
So, you must take the time to learn the basics of business and financial jargon.
This includes learning about stock options.
Here are 5 (basic) things I wish someone had told me about stock options before I took my first industry position…
1. Stock options offer the opportunity to buy equity in the company at a later date.
As a PhD who is qualified for management-level positions in industry, you will likely be offered stock options.
But, what are stock options?
If your contract includes stock options, this means that you are being given the opportunity to buy stock or shares in the company.
The key part there is: opportunity.
By definition, you do not need to take advantage of the stock options you are given and it does not happen automatically.
You need to wait for your stock to vest (see definition below) and then exercise your stock options buy purchasing shares in the company.
If you take the time to understand what is being offered to you, stock options can bring you thousands more in income per year.
Stock options offer more income because when you are offered stock options as an employee, you are offered the stock at a specific “strike price”.
The strike price is the fair market value of the stock when it has been given to you as an option, and this is the price you will always pay for the stock, even if the market value increases.
So, after a few years of having your stock options, you might be able to exercise those options and buy a share for $1 when its market value is $5.
Using the same example as above, that means if you get 1,000 stock options, you will end up paying $1,000 for $5,000 worth of stock — that’s an immediate $4,000 profit.
This is a basic explanation and there will be more complexities, depending on your particular situation.
So, it’s always good to sit down and find out the specifics of your offer.
2. Not all stock options are created equally, so understand percentage of ownership.
Stock is the general term used to define part of a company’s equity.
But, if you are talking about one specific company, let’s say Amgen, the wording changes slightly.
If you are interested in having stock in Amgen, then you would purchase shares from Amgen.
A share is a certain fraction of a company’s equity: a share of what the company is worth.
So, the value of your shares in a company will vary, depending on the value of that company and how many pieces the equity has been split into.
Your job offer might say you get 5,000 stock options.
But, that number (5,000) on its own is meaningless.
Think of it this way: 5,000 may be the number of pieces you get, but how many pieces has the company has been split into?
For example, you could be getting 5,000 of 50,000 parts or 5,000 of 3,000,000 parts — 2 very different percentage amounts.
You need to find out what your percentage of ownership will be.
The value of those 5,000 shares also matters.
One share could be worth $1 or $1,000.
So, when your contract says you have 5,000 stock options, you need to seek clarification about what that actually means.
It is okay for you to ask your employer these questions during the negotiations.
It’s also important to realize that, for start-ups who are not a public company, the value of a stock is purely theoretical until they go through a liquidity event.
A liquidity event is when another company acquires the start-up, or they go through an initial public offering and become a public company.
3. When negotiating, always find out what is fair for your position at your company.
First, always remember to negotiate your base salary BEFORE you discuss other types of benefits, such as stock options.
Companies will usually have a set scale of the stock options that they offer to employees at certain levels in the company.
This just means that the CEO and the VPs of the company will have far greater stock options than someone in a lower level management role.
When you are negotiating your stock options, ask if the company has a standard scale.
Does your offer fit with the position you are being offered?
If it doesn’t, ask why and push for it to be within the standard range.
Also, if you want greater stock options, ask if it is possible for you to move up into the next bracket.
What would it take to make that happen?
Always use your win-win language when negotiating, and ask open-ended questions.
It’s not going to hurt you to simply ask if it is possible to offer you more or better stock options.
4. Understand these common equity terms.
When moving into a management role, you will have already improved your business acumen.
When talking about and understanding stock options, you will need to take that one step further and learn a few financial terms.
Understanding what these terms mean will help you ask intelligent questions as you gain clarification about your contract.
- Option: the right to buy stock in the company, in the future, at a predetermined price, your strike price.
- Exercise: the action of using your vested stock options to buy shares in a company.
- Vesting schedule: the time frame and rules for when you will have access to the full stock options offered to you. This means that you won’t have the ability to exercise all or a portion of your stock options until a certain time period has elapsed.
- Vesting cliff: the time period where you cannot exercise any of your stock options. This is commonly a year. It is designed to protect the employer from an employee getting hired, exercising their stock options, and then quitting without putting in work at the company.
- Strike price: the price that you are offered the stock in your contract. This is the price you will pay for the stock, even if the market value of the stock increases.
- Initial public offering (IPO): when a private company become a publicly traded company by offering stock to the public for the first time. For start-ups that have yet to go through an IPO, the value of the stock options is just an estimate. Be aware of this if you are made lofty claims about the potential value of stock.
5. Ask questions and ask for clarification — always.
It is completely acceptable for you to ask your employer to thoroughly explain your employment contract, including stock options.
If they are offering this as a part of your benefits package, then they should have the expertise to explain it to you.
Don’t make the mistake of being worried about looking stupid and therefore not asking.
It’s much better to ask.
Because, if a company cannot explain the stock options to you, or they don’t seem confident, this can be a red flag.
You can prepare for the conversation by learning about stock option basics and basic terms that are used in the contract.
This will allow you to ask great questions and come to a full understanding about what you are being offered and how you can make the most of it.
Stock options are a great opportunity to grow your wealth. They allow you to benefit from the success of the company you are working for but, in order to take advantage of them, you need to understand the basics of how they work. For example, it’s important to understand that stock options offer the opportunity to buy stock, not all stock options are created equally, understand percentage of ownership, when negotiating always find out what is fair for your position at your company, understand common equity terms, and ask questions and ask for clarification, always. It may seem like a lot to learn, but it’s imperative for your industry success that you learn about these equity concepts.
If you’re ready to start your transition into industry, you can apply to book a free Transition Call with our founder Isaiah Hankel, PhD or one of our Transition Specialists. Apply to book a Transition Call here.