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Background

I am approaching the end of my vesting term of 4 years. The vesting plan follows a typical 4 year term, with 1/48th of the total options vesting every month (after the initial year-long cliff).

After the term ends, I will no longer be vesting any options, so my effective monthly compensation will decrease by 1/48th of the total value of the options.

Questions

  1. Am I thinking about this correctly? If I'm just being greedy here, let me know.
  2. Should this be brought up during salary negotiations with my company? For example, should I make an attempt to value the options and request an equivalent salary increase? Alternatively, could I request a new contract which basically continues vesting options at the same rate for another couple years?

More info

I work at a startup which has scaled - considerably but not dramatically - over the last few years. The company has more income, the odds of an exit event are greater, etc. 1% equity (made up number) in my company is worth more now than it was when I signed the contract. But it's very hard to quantify any of this even remotely accurately, except for the revenue which I do have some insight into.

I understand that stock options are, among other things, a way for startups to attract talent without being able to pay market rates for salary. To be crude about it, that part of the attraction finishes once the options are vested, except to the extent that continuing my work at the company will make the options worth more. But as the company expands, my ability as an individual contributor to increase the company's valuation diminishes.

So if the company doesn't share the view that a salary increase is warranted after the vesting period, that makes me more inclined to move to a bigger company, or find another startup, where I could command the same or better salary and maybe begin vesting options with them. However, I like working at my current company so I'd like to find a way to be content, either by negotiating a raise or by convincing myself I don't deserve one. I appreciate any insight on my thought process here.

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  • An important consideration here is whether you can sell your equity back to the company or on a secondary market. Some employers have policies that I have heard of (never experienced first-hand) that state you forfeit any shares you have and options must be exercised within 90 days or so. In that case, your motivation for staying is not forfeiting the already vested shares/options.
    – Chris
    Mar 21, 2022 at 20:16

4 Answers 4

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Yes, you are thinking about this correctly, and are not being greedy.

If your options are fully vested and you are being paid a below market salary, then you have no economic incentive to stay at your current company. It would be in your best interest to get a new job at a market salary.

It is a common practice in this situation for companies to provide employees with more options to keep them at the company.

You can say to your boss that you are happy in your position and you would appreciate additional options as additional motivation to help the company succeed and to reward you for your tenure. This can be done in a non-confrontational way and is a win-win for you and the company, in that the company gets to keep a valuable employee.

Keeping good employees happy is very important at a startup.

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  • I'm accepting this answer because 1) it contains advice about how to behave in my situation and 2) I don't believe the options being a "retention bonus" is a practical distinction in this situation. I have one followup: you mention that it is common practice to offer more options -- could you please explain how you know this? I can't find anything online about it. Thanks to all commenters for their input Mar 21, 2022 at 0:21
  • It is a challenge for the company. Offering options saves cash at a time when cash is often hard to come by. The options you were initially granted were probably at a rather low exercise price, reflecting the value of the stock at that time. They were still not that valuable (pretending you could sell them) because of the risk the company would fail. If the company has grown, the exercise price of any new options will presumably be rather higher. You might be emotionally tempted to compare the value of the last set of options you were granted to the new options you are offered. Mar 21, 2022 at 0:58
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    The proper comparison is what you are offered going forward compared to what other companies are offering going forward. Mar 21, 2022 at 1:00
  • @RossMillikan Another proper comparison is what value you provide for the company compared to what the company can get through alternatives. Your expertise in this company is more valuable in the company than it is elsewhere; if you only accept "what another company will offer me" as your value, you are undervaluing your contribution to this company. And a company that prices employees that way is a good company to find alternative employment away from for your own medium-term interests.
    – Yakk
    Mar 21, 2022 at 17:59
  • @Throwaway10110010019 Agree it's not uncommon for companies to give an annual "equity bonus" in the form of stock or options, which typically vest over several years and would fill the same role as a retention incentive. A reasonable estimate for the value of an option at the time it is struck may be about a quarter of the current stock price - I've worked places that offered an equity bonus option of X shares or 4X options. But recognize that your very early options may have become extremely valuable with no realistic way to match that in salary or more equity at this point in time. Mar 21, 2022 at 18:51
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Am I thinking about this correctly? If I'm just being greedy here, let me know.

No, you're not thinking about this correctly. You got a retention bonus, even if it was "sold" to you as some kind of compensation for lower salary. It is not your compensation for work, but rather compensation for staying with the company. Your work is not valued differently, but if you didn't continue receiving retention bonuses - your staying with the company is.

Should this be brought up during salary negotiations with my company? For example, should I make an attempt to value the options and request an equivalent salary increase? Alternatively, could I request a new contract which basically continues vesting options at the same rate for another couple years

Should is not a question anyone but you can answer. Could? Definitely. The company doesn't have to agree to any of those requests, of course.

Generally, it's a common practice for companies to offer continuous equity "refreshers" to ensure retention. If you were not offered one - I'd suggest thinking why. If you think that you can get better compensation elsewhere - get an offer and you can show it to your managers as part of your negotiations (however I'd advise to just move somewhere else where you'd feel appreciated).

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    There's only one question there :-D
    – littleadv
    Mar 18, 2022 at 21:19
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    I would argue that the options are not a retention bonus. It was explicitly formulated as compensating for a lower-than-market salary. Does this affect your answer? Mar 18, 2022 at 21:31
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    @Throwaway10110010019 no.
    – littleadv
    Mar 18, 2022 at 21:33
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    @littleadv Okay, it would be clearer if you quoted only that question.
    – nanoman
    Mar 18, 2022 at 22:44
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    Since stock options (or grants) are a retention bonus, the company should issue you more if they still care about retaining you.
    – jamesdlin
    Mar 19, 2022 at 18:34
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In addition to what littleadv said, if the company does well, the actual monetary value of those options will grow over time, so you can continue to gain value from them. (Assuming you don't leave the company before its shares become tradable, of course.) So in some sense, you can think of it as a part of your compensation which is tied to the company's value, in contrast to your salary which is not tied to the company's value. The money you (could eventually) make from options comes primarily from an increase in the value of each individual share, not an increase in the number of shares available to you.

If it helps, you can think of the stock options as part of your compensation package at the time when you initially received the grant. Like, suppose there were no vesting period; you would be compensated with, say, a salary of $5000 per month plus some number of "conditional value-generating units" (i.e. stock options) which might gain you an additional $1000 (or $2000 or $10000 or whatever) per month over the long term if the company keeps growing. It's just that the company holds back your access to those "conditional value-generating units" for a while as a way of enticing you to keep working there for four years... but unless you were going to exercise and sell the options during those four years, it doesn't matter that they didn't become available to you until later, because you pay the same amount of money to buy the shares regardless of when you actually do it.

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    Once the options vest, you can exercise them and own the stock. You don't have to stay at the company to get the benefit of the growth in value.
    – Barmar
    Mar 20, 2022 at 8:20
  • Yes, that's one of the differences between stock options and salary which I intentionally glossed over.
    – David Z
    Mar 20, 2022 at 8:33
  • Barmar, if the shares went from $100 to $120, and you have 1000 $100 options, you'd have to invest $100,000 to get $120,000 worth of shares and continue benefitting from growth - or cash in the $20,000 gain and invest that in $20,000 worth of shares. Let's assume we knew the shares will go to $140 in two years. You get the other $20,000 if you stay for two years, or if you invest $100,000. That's a huge difference.
    – gnasher729
    Mar 21, 2022 at 10:37
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I work at a startup which has scaled - considerably but not dramatically - over the last few years. The company has more income, the odds of an exit event are greater, etc. 1% equity (made up number) in my company is worth more now than it was when I signed the contract. But it's very hard to quantify any of this even remotely accurately, except for the revenue which I do have some insight into.

Let me just point out that getting more shares at this point may or may not actually be a raise, depending on the outcomes of these shares. I don't know what your employer's rules are, but generally you are required to buy any vested shares you wish to keep once you leave the company (which might be a substantial outlay), and your ability to resell those shares is dubious at best. If you can't afford to (or choose not to) buy all of the shares at that point, the rest are forfeit, and wasted.

It is possible, therefore, that you might be taking a pay cut by being granted more shares if, in the end, you buy them but loose money on them, or can't afford them. Remember that there is no guarantee that the company will ever be liquid, and many companies go years without an IPO or other event, simply taking more rounds of investment and diluting the existing shareholders.

If you are happy with the company, you should certainly stay, but you might want to consider asking for cash, and playing the "I already took one for the team (in terms of taking shares instead of salary), now I want cash" card.

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