Understanding Your Job Offer
If you are considering an offer letter, congrats! You have probably faced several rounds of interviews to get to where you are today. This article is intended to assist you in understanding the part of your offer letter that covers any Stock Based Compensation (SBC), which you may receive as part of your compensation package.
15 Questions to Ask to Understand Your SBC
If you only have a few minutes, these are the questions we recommend you ask. Detailed explanations follow later on in the article. Some questions may not apply to you, but you can copy and paste what does in your email back to your potential employer. With that said, here are the questions we recommend asking to understand your SBC:
- What type of equity compensation am I receiving (ISOs, NSOs, RSUs, etc.)?
- What percent of the company does this offer represent on a fully diluted basis?
- What is my vesting schedule, and when will my vesting start?
- Am I eligible for early exercise?
- If I depart the company, how long will I have to exercise my vested options?
- What repurchase rights are there on my vested stock or options?
- Are there accelerations provisions to my vesting schedule?
- What was the valuation and price per share of the company’s last round of financing?
- How much preference is there (in dollars) on top of the common stock pool?
- How fast is the company growing?
- How much money is in the bank, and what did the company burn (or lose) last month?
- What happens to my vested options upon death, disability, separation without cause, and separation with cause?
- (Optional) How many more rounds of new financing does the company expect to raise?
- (Optional) What is the company’s policy on additional stock or option grants?
- (Optional) Can I trade some of my salary in for more options?
A few words to start off before we get into why these are the key questions: Most companies, especially those that are financed by Venture Capitalists (VCs) or owned by Private Equity (PE) firms, have a hiring plan. This governs who is to be hired over a month, quarter, a year, and so on. If you have an offer letter, this company wants to hire you. You fit into their plan, which they need to hit. They do not want to go back and run another recruiting process to hire for your role if they think you are the one. If they used a recruiter, that recruiter wants you to take this job because they get a commission. This conversation around hiring plans is especially true when you have tens, hundreds, or thousands of positions to fill each quarter, which is what plans look like for companies growing well. We are mindful of the economic climate, however, which can alter a company's hiring as well as lower their best offer.
There is great advice from former Apple executive Guy Kawasaki that you should wait until you have a job offer in hand to ask more probing questions about your company. We agree. A company can always pull an offer letter. As you consider your offer and ask questions, you want to convey that you are excited about the home run opportunity but want to make sure you have the right answers before making a multi-year commitment. A company should not fault you for that.
Our final word of caution is that if your potential employer is difficult to work with or dishonest when you have an offer letter, then you should ask what other areas this may apply to when you start your new job. Getting answers should not be akin to pulling teeth.
Understanding Each Question
1. What type of equity compensation am I receiving (ISOs, NSOs, RSUs, etc.)?
If you have not already done so, check out our article on the basics of SBC. You should be able to identify what type of SBC you are to receive and the moments in time you will be taxed.
2. What percent of the company does this offer represent on a fully diluted basis?
This question may be the most important but often overlooked. 20,000 options at one company are not equivalent to 20,000 options at another company. Not only will each company have its own valuation, but each will also have a different number of shares outstanding! Think about the numerator and the denominator.
Often companies will show the number of options and what payouts you get at certain exit values. There are a few problems with this approach. The first is that the exit valuations may be overly optimistic. The second is that your percentage ownership evolves over time. You may get tens of thousands of options but companies may have millions and sometimes billions of shares outstanding. Consider how many new options are going to be issued at your company over the next year to new hires and new investors.
What you want to know is, how many fully-diluted shares outstanding (FDSO) are there in this company? There is little wiggle room to this figure as it accounts for all common shares, preferred shares, issued options, and other types of shares. The FDSO number will likely grow over time if your company raises more money, hires more people, or goes public via an IPO. If you are worried that a company is being disingenuous about their shares outstanding figure, you should how they define shares outstanding.
If you join a venture-backed business, it is likely that you will own less (not more!) of your company over time. This is due to future fundraises in order to capitalize the company. Each round likely dilutes your percentage ownership by as little as 5% and up to 20%. On top of that, you may see 2% to 5% annual dilution due to new hires who get SBC like yourself. If you join a business with no intention of raising outside money, such as one that is backed by Private Equity (PE) or one that is public, the topic of dilution matters, but the effect is likely smaller.
Do not be surprised if you get diluted when your company makes an acquisition and issues new shares to pay for all or portion of it. While you may own less on a percentage basis of the company, your hope is that the overall value has grown. As a rule of thumb, you should assume there will be at least a few percentage points of dilution each year (around 5%) and acknowledge that you could be diluted by 50% or 100% prior to being able to sell.
If your company plans to go public via an initial public offering (IPO), this is another event that could dilute your ownership. IPOs are inherently a financing event where a company can raise cash from public market investors. Some companies such as Slack and Spotify have chosen to go public without raising additional primary capital. They instead are opting to direct list. You can read more about IPOs and direct listings here.
3. What is my vesting schedule, and when will my vesting start?
SBC plans often have a multi-year vesting schedule over which you earn your options or shares. These plans vary with the most common being a four-year vesting schedule with a one-year cliff. In that case, 25% of your options vest after year one (the cliff) and the remainder vest monthly over the remaining three years. We wrote a more detailed article on vesting schedules here. Be on the lookout for other vesting schedules as they do exist, and if you see anything interesting, please let us know!
The other portion of this question is helpful to confirm that you start vesting around the start of your employment and not for some reason at a much later date. You do not want to hear that your vesting starts (or commences) a year after joining when your company's value may be significantly different.
4. Am I eligible for early exercise?
Depending on your situation, it may make sense to consider an early exercise. Per data from Carta, 15% of the options on its platform are early exercisable. You can read more about early exercising here.
5. If I depart the company, how long will I have to exercise my vested options?
Employees who depart a company historically had 90 days to exercise their vested options (ISOs or NSOs) in what’s called an exercise window or Post-Termination Exercise (PTE) period. In recent years, some companies have extended this window. Read more about PTE and the companies which offer windows over 90 days here.
6. What repurchase rights exist on my vested shares or vested options?
To us, SBC is compensation for work that has been done. You want to ensure that you take part in the appreciation of your company even if you depart. You should figure out if your stock has repurchase rights, which is a company’s ability to buy back shares or vested options with or without consent at a set price. There have been cases where companies repurchased shares upon departure at share prices the stock was issued at years before. It is not standard to include these types of repurchase rights, and they are negotiable. Sometimes a company’s lawyers include repurchase rights, while the founders are unaware of them.
You may also hear of repurchase rights referred to as clawback rights.
7. Are there accelerations provisions to my vesting schedule?
The most common form of acceleration is double trigger acceleration. If your SBC has double trigger acceleration, then your vesting accelerates when two events occur, typically a change of control and termination within some window around the closing date. If your SBC has single trigger acceleration, then only one event (such as a change of control) can trigger the vesting of your SBC. You can read our article on vesting here.
8. What was the overall valuation and price per share of the company’s last round of financing?
This question will help you compare the common share price of your SBC versus the preferred share price paid by investors in the last round of financing. You may see that your common shares are at a discount to the most recent preferred share price because preferred shares typically have rights that make them more valuable than the common stock employees receive. These rights include liquidation preferences and the right to appoint a board member. You can read more about that here.
You should also research who the most recent investor was and the types of investments they make. You want to get a sense of what type of outcome they are looking for in their investment. A VC who is the first, second, or third round of financing into a company may see the potential to make 100x their money, while a firm who invests a round or two prior to the IPO or buys businesses outright may be looking to make 3x or less on their investment.
9. How much preference is there (in dollars) on top of the common stock pool?
This is another key question! It will help you understand what you make across a variety of scenarios. An offer letter may show you a table with how much you make at certain valuations. It is wise to lower that valuation band and rephrase the question. Ask, “if I own 1% of the company and it sells for $75 million, $750 million, or $7.5 billion, will I take home $750,000, $7.5 million, or $75 million, respectively?” You may hear, “not exactly,” because of the company’s preference stack. A preference stack results from preferred stock. You should push on this question to understand your proceeds at different valuations. You can read our article on liquidation preferences here.
If you are comfortable, it helps to ask if there have been any preferred securities issued with a liquidation preference above a 1x.
10. What is the company’s policy on additional stock or option grants?
SBC is as much about attracting new talent as it is about retaining existing talent. Some think of SBC as a payment in time, while others think of SBC as a recurring practice. You may want to know that if you stay with a company, vest, and subsequently exercise all of your options, your company may give you additional options in what is known as either an option refresh grant, or reload option. If your company says they do refresh option plans, it is not a guarantee this will apply to you. It is a good question however to learn more about your potential employer.
11. How fast is the company growing?
This question helps to understand a company’s growth and trajectory. You may be given a customer growth figure, revenue growth figure, user growth figure. It all depends on the stage of your company. This question will also help you understand how feasible the exit valuations are that you are being pitched. If your company is worth $50 million, think about it how much needs to go write before the company is worth $5 billion. Gravity tends to pull you in one direction – down. Do not expect a company that grew 30% last year to grow 75% in the future. Likewise, do not expect a company to grow 10% the year after it grew 200%. There are always exceptions to the rule, but this heuristic is more often true than false.
It can make sense to join a company growing 30% instead of one growing 200%. It is all in relation to how expectations are set, how much of the company you will own, and how conservative a company is in thinking about future dilution and their valuation today versus their valuation later on.
12. How much money is in the bank, and what did the company burn (or lose) last month?
This question comes from an article by former Y Combinator President Sam Altman and is great to get a sense of where the company is today. It does not rely on future performance and lets you know if your company is about to run out of money within the next few weeks or months.
These next few questions are optional depending on your personal situation:
13. How many more rounds of new financing does the company expect to raise?
In other words, how should I think about future dilution from today and the type of exit the company is aiming for.
14. Can I trade some of my salary in for more options?
Some companies will present two offers – one with higher compensation and lower SBC and the other containing the opposite. If you are excited about the potential of the company, some will allow you to forgo some cash compensation in return for more stock. Feel free to ask. This is only relevant if your financial situation allows you to forgo cash compensation for potential (read: not certain) payment years in the future.
15. What happens to my vested SBC upon death, disability, separation without cause, and separation with cause?
This may be something you want to ask about, and it should be spelled out in the company’s stock plan.
One of our favorite pieces of advice comes from the folks at Wealthfront who guide us to beware of bias. If you are working with a third-party recruiter, they will get compensated for getting folks “placed.” If you are speaking with folks at the company, they have chosen to be there for a reason. They should understandably be excited about the company. You want to be thoughtful and consider the bias and incentives of the person across the table from you involved at every step of the process.
When you sign your offer letter, your work is not over. You need to make sure you receive your stock or option grant. This is especially important if you are joining a company early on in its life because quick changes can dramatically alter the valuation of your company and potentially, the exercise price of your options or the FMV of your stock. Once you join a company, continue to follow up until you have officially received your SBC grant.