How do you evaluate and negotiate equity compensation offers from potential employers?

1 Understand the types of equity

Equity compensation can take different forms, such as stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), or stock appreciation rights (SARs). Each type has its own features, benefits, and drawbacks. For example, stock options give you the right to buy shares at a fixed price in the future, while RSUs grant you shares after a vesting period. ESPPs allow you to buy shares at a discount, while SARs pay you the difference between the current and the grant price of the shares. You should understand the terms and conditions of each type of equity, such as the vesting schedule, the expiration date, the tax implications, and the dilution risk.

2 Compare the value of equity

Equity compensation is not easy to value, as it depends on several factors, such as the current and future performance of the company, the market conditions, and the dilution rate. One way to compare the value of equity is to use the fair market value (FMV), which is the price at which the shares are traded on the public market or estimated by an independent valuation firm. Another way is to use the expected value, which is the probability-weighted average of the possible outcomes of the equity. For example, you can multiply the number of shares by the FMV, and then adjust it by the vesting probability, the exercise probability, and the discount rate. You should also consider the opportunity cost of equity, which is the value of the alternative compensation you could have received elsewhere.

3 Negotiate the terms of equity

Equity compensation is not a fixed or standardized offer, but a negotiable one. You can negotiate the terms of equity, such as the amount, the type, the vesting schedule, the exercise price, or the acceleration clauses. To negotiate effectively, you should do your research on the market rates, the company's valuation, and the industry trends. You should also have a clear idea of your goals, expectations, and priorities. You should communicate your value proposition, your rationale, and your trade-offs. You should also be flexible, respectful, and realistic.

4 Evaluate the risks and rewards of equity

Equity compensation is not a guaranteed or risk-free reward, but a speculative and uncertain one. You should evaluate the risks and rewards of equity, such as the volatility, the liquidity, the tax consequences, and the diversification issues. For example, equity can fluctuate significantly in value, depending on the company's performance and the market conditions. Equity can also be illiquid, meaning that you may not be able to sell it easily or at a favorable price. Equity can also trigger tax liabilities, depending on the type, the timing, and the jurisdiction of the equity. Equity can also expose you to concentration risk, meaning that you may have too much of your wealth tied to one company. You should balance the potential upside of equity with the possible downside, and have a plan to manage your equity portfolio.

5 Review the legal documents of equity

Equity compensation is not a simple or straightforward agreement, but a complex and binding one. You should review the legal documents of equity, such as the offer letter, the equity plan, the grant agreement, the stock option agreement, or the RSU agreement. These documents contain the details and the terms of your equity compensation, such as the vesting schedule, the expiration date, the exercise price, the transfer restrictions, or the clawback provisions. You should read them carefully, understand them fully, and consult a professional if needed.

6 Monitor and optimize your equity

Equity compensation is not a static or passive asset, but a dynamic and active one. You should monitor and optimize your equity, such as tracking its value, exercising your options, selling your shares, or diversifying your portfolio. You should also stay updated on the company's news, financial reports, and stock performance. You should also be aware of the events that can affect your equity, such as mergers and acquisitions, IPOs, or layoffs. You should also review your equity strategy regularly, and adjust it according to your goals, preferences, and circumstances.