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The tech world has been in flux and as things have shifted in the past year, you may find yourself evaluating new opportunities. Whatever move you might be considering, there’s a good chance that at least a portion of your new pay package will come in the form of equity compensation. And while these awards can be lucrative, they can come with a host of implications and complexity. No doubt your professional satisfaction and happiness will likely be at the top of your wish list, but here are a few other things it makes sense to consider from an equity compensation perspective when evaluating any future role.
1
What type of equity is being offered? Will you have to pay for the shares (options), or will they be granted to you at zero-cost (RSUs, restricted stock)? If you’re getting options, oftentimes you’ll get a mix of ISOs and NSOs due to the $100k ISO limit, which prohibits employees from receiving more than $100k worth of exercisable options in a year. You should also confirm the vesting schedule, as well as any provisions around vesting acceleration, sometimes referred to as single-trigger or double-trigger vesting.
2
You’ll want to know some key inputs for evaluating the offer. The grant can be presented in a few different ways— for example, either in number of shares granted or a dollar amount of equity. Regardless, you’ll want to calculate the percentage of equity ownership offered. You’ll need the number of fully diluted shares outstanding, and if the company is still private, the most recent VC price per share (post-money valuation). Note: this is different from the current FMV or 409(a) valuation. By calculating the percentage of ownership offered, you’ll be better able to compare your offer across comp. guidelines for similar companies/roles. And if the company is cagey or less than transparent around providing any of this information, it could be a major red flag.
3
How much and what kind of equity you’ll receive depends a lot on the stage of the company. If it’s very early-stage, there could be a lot of upside opportunity, but you might have to wait a long time for a payoff. If the company’s still private, what’s the expected outlook for a possible acquisition or IPO? Does the company offer other liquidity options like tender-offers and/or share buybacks? While it’s nice to know that you may be sitting on a large nest egg, liquidity squeezes can become a real burden, psychologically and/or otherwise, so you should have some sense of your liquidity runway and what that means for your financial plan overall.
4
Tax planning around vesting/exercising/selling, etc. most often requires an individual and multi-year approach, so it pays to start thinking about potential tax outcomes early in the process. As with anything complex, there isn’t one right answer when it comes to managing taxes around your equity comp. Each type of equity comes with its own implications and tax treatment and tax decisions are often about the interplay between risk and reward. For example, should you exercise your options once they vest? You may be able to minimize taxes overall on your shares, but how much are you willing to put up in this situation given that the future liquidity, share price and trajectory of the company may still be somewhat hard to predict.
Though much of the decision-making around taxes and equity comp. comes as shares begin to vest, there are a few things you should clarify around the time of grant that may save you a ton of money in taxes down the line. First, you should know if your shares are eligible for QSBS (qualified small business stock) treatment. This designation generally applies to earlier-stage companies and to grants for founders or very early employees. There’s a list of specific rules to be considered— Is the company a C-corporation? What type of business is it and are its gross assets $50M or below? If you do have QSBS stock, you should be able to take advantage of the planning opportunities around one of the most lucrative tax breaks provided to equity holders, but you’ll need to make sure avoid any pitfalls that might lead to the shares losing their QSBS status.
You should also think about the 83(b) early exercise election. This benefit, again, generally only makes sense at earlier-stage companies when the FMV per share is very low. Generally, the IRS taxes you when your restricted stock or options vest, but by making an early-exercise 83(b) election, you choose to be taxed at the time of the grant. This allows for both a small amount of outlay of cash to exercise (because the FMV per share is still so low), and many times results in zero taxes, since the spread between what you paid for the shares and the current FMV is often zero. There is a very small window 30 days after grant) to make this election, so you should work with company management to help you through this process.
Equity comp can be one of the most lucrative aspects of working in tech, but it injects a certain amount of risk in an employee’s overall compensation. Unlike other compensation structures, it transforms the employee into an investor, which requires a different type of financial management and consideration.
Myles is a Partner based in the San Francisco office. He provides investment and financial planning advice to help clients achieve their short- and...Read more
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