Depending on your professional clout and the company’s need, you may be able to negotiate your equity compensation when you are hired or get promoted. Grants of stock options, restricted stock, and/or restricted stock units (RSUs) can be increased or structured in a way that sweetens them as part of your employment deal.
A recent webinar on negotiating equity comp that I moderated featured three advisors with experience in helping clients negotiate compensation (including a compensation attorney). While everyone’s situation is unique and requires personal advice, the general guidance these experts provided offers some helpful knowledge going into the discussions.
1. Be Realistic And Informed Before Attempting Negotiations
The ability to negotiate compensation depends on your importance to the hiring company, observed webinar panelist Art Meyers, an employment and executive compensation lawyer and the founder of Meyers Law Firm in Naples, Florida. “It doesn’t mean you have to be in the C-suite,” he added. “You can be a very talented engineer in an area in high demand. It depends.”
However, unless you are a C-level executive, “most of the time there is not a ton that is negotiable in the actual grant offer,” cautioned financial advisor AJ Ayers, co-founder of Brooklyn FI in New York City. “You can ask for more shares, but a lot of time these grant documents are ‘take it or leave it.’ If the company makes a change for one person, it has to make the change for everyone else, go through a board review, it’s messy. So don’t waste your time in trying to ask for things that are not going to be granted.”
AJ’s view was echoed by webinar panelist Beata Dragovics, a financial advisor and the founder of Freedom Trail Financial in Boston. “You have to be VP-level, in my opinion, and C-level to really start negotiating,” she explained. For clients with that degree of clout, she suggests going directly to HR, especially in a public company, to find out what they can negotiate in the hiring offer. “HR is expecting you to negotiate. I coach clients to ask HR what’s negotiable.”
Having that realistic and informed perspective is vital, the webinar panelists agreed. If you overplay your hand and ask for too much, your approach may backfire. Both Beata and AJ said they have seen employment offers actually rescinded after negotiating ploys that were too aggressive, leading the hirers to reconsider whether the person was the right fit for the company.
2. Understand Compensation Trends In Your Industry
What are the factors and features to focus on in negotiations? First, research the trends in your industry, suggested Beata Dragovics. “I find for us that trends are significant,” she said. This is one area, in fact, where consulting with an advisor can offer a key advantage. Over the years, her firm has amassed significant knowledge of compensation practices among the biotech and pharma industries in which most of her firm’s clients work.
“You learn from clients, you learn from recruiters, you learn from attorneys. You learn every time you negotiate. Companies want to stay competitive, so they will pretty much offer the same kind of equity compensation. The trends are very consistent.”
Art Meyers observed that with a public company it’s easier to research trends. You can review corporate SEC filings, which are public, to see what they do with executives and key employees. He said he finds information on the company’s grant guidelines in that way or from consulting or recruiting firms. “With a good stock comp calculator,” he added, “you can see what those equity awards may realize.”
3. Evaluate Equity Grants You Are Leaving Behind
When considering negotiation leverage, Art advises clients to factor in equity awards granted by their current employer that they would forfeit by leaving to work for the hiring company. “I would ask for make-whole awards if you’re leaving something on the table. You can ask for, and often you will receive, an additional award, typically RSUs, in which you have a short vesting schedule: six months, a year, something that mirrors the remaining vesting schedule at the other company.”
4. Know The Best Times To Negotiate
What are the best times to try to negotiate equity compensation? “I would say before hire and before promotions,” said Art. “Those are leverage points.”
For annual stock grants or special off-cycle grants that happen later, it all depends on your performance at the company, he explained. “What’s the value to the company? Can you be easily replaced? What’s the history or culture at the company or in the industry? All of these things play into whether you can get annual grants or off-cycle grants.” With public companies, Art recommends making your case 60 days in advance of the normal grant cycle.
5. Choose What To Focus On In Negotiation
Whether or not to negotiate compensation often comes down to whether the initial offer is adequate, observed AJ Ayers. “Does this offer match your financial needs?” she asks clients. “If someone is a solo breadwinner supporting a family of three, maybe taking a pay cut and some incentive stock options (ISOs) in a startup company is too much risk, in my opinion. As their advisor, I’m going to advise them to look at a more steady salary with RSUs instead, where we can see the historical stock price and get a sense of what that compensation is going to look like.”
One method that AJ likes to use with clients is to make a list of all the things that are important to them: “401(k)s. Salary. Is there a nice up-front bonus? If you’re cash-poor right now, that might be really helpful.”
She noted that some tech companies now offer exceptional benefits. “Is there fertility support? If you have a client who is having trouble getting pregnant, a $50,000 fertility support could be way more valuable than an additional RSU grant. What’s right for the client, what do they need to support their family: that’s how we come to the offer table and start evaluating these different offers.”
Similarly, Beata picks just a few attributes that are most important to her clients and negotiates on them. She emphasized that the current market environment in an industry will determine the extent of potential negotiations.
6. Protections At Termination
Protecting equity awards in the event of job termination triggered by various reasons is a crucial point to consider in negotiations and in any severance provisions. AJ suggests that her clients have an attorney review the employment agreement. “There’s this nasty clause we see in some of these agreements involving at-will firing, in which a company can fire someone at any point for any reason,” she warned. “The vesting stops and you forfeit stock options. It is a good idea to have these employment agreements reviewed by an attorney.” Any clause deemed problematic can be addressed in negotiations, she explained.
For more guidance on your equity compensation in layoffs, see another Forbes.com article that I wrote: Protect Your Stock Options And RSUs In Job Loss: 3 Key Actions.
7. Know How Private Companies Differ
With a private company, noted Art Meyers, getting insights into trends and expectations for negotiating compensation is more difficult. “What you really want to do is to convert the number of shares at grant to a percentage of ownership on a fully diluted basis and ask for either a transaction value, a current accounting value, or the current Section 409A valuation they presently have to get for some sense of what that’s worth.”
A Section 409A valuation is an appraisal of private company stock to determine its fair market value using various methods allowed by IRS regulations under Section 409A of the Internal Revenue Code. Importantly for stock options, the 409A fair market value “should be the exercise price that you’re offered,” said AJ Ayers. “But they may not tell you that when you’re looking at job offers. So you need to go find the 409A on your own.”
The 409A valuation is a very useful piece of information to track down, along with any information on preferred stock sold to investors, AJ asserted. She warned that you’ll want to ignore any spreadsheet illustrations boasting that the startup will be “the next Amazon” and keep your expectations realistic.
Early-stage startups tend to offer stock options rather than the double-trigger RSUs that have become popular for later-stage pre-IPO companies. That means you need to ponder the option exercise price. With stock options in a startup, AJ Ayers urges clients to consider whether the exercise price is affordable enough for the options to make sense as compensation.
“If the price is less than a dollar, that’s probably doable for a family who’s got some savings or who could sell some investments to do that,” she explained. “But if we’re talking about ISOs or even nonqualified stock options (NQSOs) with a $5 or $10 exercise price, we start to lose any tax arbitrage that’s possible with exercising and then holding those shares. I’m not going to ever advise you to exercise and hold those. That’s too much risk.”
Further Resources
The webinar in which these experts spoke, Negotiating Equity Comp At Hire & Protecting It In Job Termination, is available on demand at the myStockOptions Webinar Channel. In addition, myStockOptions.com has a website section with resources on negotiating equity compensation at hire or promotion.
Read the full article here
