Can you explain stock options basics to a total novice?

Editor’s note: A version of this question originally appeared on Reddit.‍

I just received a job offer and I want to make sure I understand the stock options portion of the offer letter before signing:

“You shall receive 5,000 stock options for shares of company stock that vest over four years at the rate of 25% after your first anniversary and then monthly thereafter. The amount of options and the price of the options will be determined by the board of directors within 90 days of the start of employment, and your grant shall be governed by the stock grant agreement that you will receive at that time.”

Obviously, I won’t know the value of those stock options until the price is determined. But can someone break this down for me? I’ve never been given stock options as part of compensation.

- Anonymous

##

Dear Anonymous,

First, congratulations on the new job offer! That’s really exciting, and I hope you’re excited about the opportunity.

It’s smart that you’re taking the time to learn more about stock options — understanding your stock options and building a plan for them will help set you up for future success. Let me attempt to give you a super basic crash course in employee equity:

On the day you start your new job, you begin vesting stock options — unlocking the ability to purchase shares at a specific price once you’ve hit certain milestones at work.

In your case, your employer is giving you a time-based vesting schedule:

• You’ll unlock the ability to purchase 1,250 shares on your 1-year work anniversary
• Every month after your 1-year work anniversary, you’ll unlock the ability to purchase an additional 104 shares
• On your 4-year work anniversary, you will have vested all of your original stock grant, fully unlocking the ability to purchase up to 5,000 shares

That’s the first thing that typically surprises people who are new to stock options — you’re being given the *option* to purchase shares. Plus, every time you decide to purchase shares, you might owe additional taxes on the transaction.

Don’t let that discourage you from buying (i.e. exercising) your stock options: If your company gets acquired or goes public, you could end up seeing positive gains on your investment. Every investment carries risk, so be sure to weigh the benefits and costs if/when you do decide to exercise your shares.

All that said, the language in your job offer looks pretty standard. Most employers fail to give future employees enough information to fully understand their equity grant — it’s something we’re working on fixing here at Secfi.

In the meantime, you should chat with your recruiter about the expected value of your stock options. It’s impossible to know whether 5,000 is a little, or a lot.

If it’s 5,000 shares that are currently worth 10 cents each, you’re sitting on a grand total of $500 worth of startup equity — or roughly $125 in equity per year. On the other hand, if it’s 5,000 shares that are currently worth $20 each, you could be sitting on the equivalent of $100,000 in equity.

Ask your recruiter to share the company’s current stock option strike price, to see roughly how much equity you’re earning with this new job. If the equity compensation seems low, consider negotiating for more equity before you sign.

- Vieje Piauwasdy, Director of Equity Strategy, Secfi

Do you have a question about your stock options? Email us at ask@secfi.com