How to evaluate and negotiate your offer

Figuring out fair compensation can be challenging in any environment, but adding equity compensation into the mix can make evaluations even more complex. That's because the value of stock options and other types of equity compensation can be unclear and unpredictable, especially at private companies where stock prices are generally less transparent or may have less consensus.

Salaries generally provide consistent paychecks, whereas equity can rise and fall over time. And similarly, initial compensation offers at different companies can lead to vastly different amounts, depending on pay structure and how those businesses grow (or potentially decline) over time, as the charts below exemplify.

The first chart could exemplify a mid-stage private startup that offers a higher base salary with less equity, compared with the second example, which might be an early-stage startup. The additional equity in the second private company example, combined with potentially faster growth, could lead to higher total compensation outcomes. However, a down round or lack of liquidity options could mean that you would have come out ahead with a higher base salary, as in the first example.

In other words, compensation offers aren't always apples-to-apples comparisons, because the starting points don't always lead to the same ends. Especially at private companies, you might have limited insights into a given company's growth trajectory and path to liquidity.¹

You also might lack visibility into what other employees at the company or peers in similar roles elsewhere received in equity compensation. So, you might not know whether you're getting a fair offer.

However, this information gap is closing.

Resources like Forge have emerged to help prospective employees analyze private company valuations.² Other sites like Levels.fyi and forums on sites like Blind can also help when it comes to benchmarking equity offers for your job role or location. And by brushing up on your knowledge of how equity compensation works, you can more easily evaluate pay packages.

What is equity compensation?

Equity compensation is a form of non-cash pay that represents an ownership stake in a company. Instead of — or often in addition to — a traditional salary, employers grant employees shares of the company, stock options or other equity-based instruments.

Companies offer equity to attract top talent, conserve cash and align employee interests with the company's long-term objectives. If the company grows and its valuation increases, the value of the employee's equity typically increases as well.

While cash compensation, e.g., a typical paycheck, provides immediate and predictable income, equity compensation offers the potential for significant financial upside if the company succeeds. However, it also carries inherent risks, as the value of the equity can fluctuate or even drop to zero.

How does equity compensation work?

Before getting too into the weeds of evaluating equity compensation offers, job seekers should understand how equity compensation works and the different ways they can be paid in stock. Also, since all types of equity compensation come with different tax treatments,⁵ it's very important that you consult with both your employer and your tax advisor and/or financial advisor about what makes the most sense for your situation.

At a high level, there are two main ways employers typically provide equity compensation:

1. Restricted stock — either restricted stock awards (RSAs) or restricted stock units (RSUs). Restricted stock typically does not have a purchase cost (or the cost is usually minimal if there is one), so if you complete vesting schedules or pass other restrictions, the shares are yours free and clear.

2. Stock options — either incentive stock options (ISOs) or non-qualified stock options (NSOs). Unlike restricted stock, stock options do not inherently turn into shares on their own. Instead, they have an exercise cost, and holders have the right to pay that exercise cost to turn options into actual company shares, but only if they choose to do so.

Here's a closer look at what these different types of equity compensation entail:

What are restricted stock awards (RSAs)?

Restricted stock awards are typically used at two ends of the spectrum — either very early-stage private startups on one side, or late-stage private companies or public companies on the other. On the early side, RSAs are usually reserved for founders and early employees. In these instances, RSAs often require you to buy the shares for their fair market value (FMV) on the date of grant (assuming you want the stock). But because the company is usually new, the FMV is typically negligible. On the later side, RSAs often have no purchase cost and are simply granted, such as to C-suite executives as part of their compensation packages.

In either case, receiving (and purchasing if need be) RSAs typically means you own 100% of the shares on Day 1 and can enjoy potential stock price appreciation and dividends. However, there are still restrictions, such as a vesting period where the company retains the right to repurchase some of your shares if you leave the company, until you become fully vested.³

So, if you are joining an early-stage private startup where you have more bargaining power as Employee #10 instead of Employee #100, asking for RSAs, where you can lock in ownership and your tax basis from day one, may be worth considering, depending on factors such as your individual compensation and tax situation (consider speaking with a tax advisor given the complexity of equity compensation taxation). At later-stage companies — either private or public — negotiating for RSAs can also mean you can participate in potential stock price appreciation and receive dividends sooner than with other types of equity comp.

What are RSUs?

RSUs are like RSAs where you receive a promise to earn actual stock, without having to exercise options. However, unlike RSAs, with RSUs you typically don’t own any shares on day one. Instead, you receive shares over time, according to a vesting schedule, such as over four years.⁴

RSUs are often used at publicly traded companies, but you might find a late-stage private company offering them, too.

What about stock options?

Stock options are commonly used at early- and mid-stage private startups. Late-stage private companies could offer them too, but some transition to RSUs as they approach IPO status. Unlike restricted stock, however, with stock options, you don't inherently receive shares on the grant date. As the name implies, you have the option to buy shares, based on the exercise price, also known as the strike price, which is generally set at the time of grant, based on the FMV. Then, after you vest, you have the option to pay the exercise price to buy the shares. Ideally, the exercise price at this point would be below the current FMV, if the company's value has appreciated over time. However, there's no guarantee that you'll be able to exercise the options for a profit, as the share price might not exceed the exercise price by the time you can cash them in. Also, the tax consequences may be larger with options than with RSAs and RSUs, such as if there's a large spread between the strike price and current stock price. So, these different levels of risk might affect how you value different types of equity compensation offers.⁶

What is the difference between ISOs vs. NSOs?

If you're offered stock options, it's also important to evaluate what type of options the employer provides.

Incentive stock options (ISOs) can offer more favorable tax treatment, as employees can avoid federal income tax until they sell their shares. However, this favorable tax treatment comes with more strings attached. Key restrictions include only being available to employees (as opposed to consultants and advisors), generally needing to be exercised within termination of employment, holding period requirements and limits on how many ISOs you can exercise before the excess are treated as NSOs (and thus lose the favorable ISO tax treatment).⁷

Non-qualified stock options (NSOs) have more flexibility; your company might allow you to transfer these options to others, for example. But NSOs are taxed when exercised.⁸

Benefits and risks of equity compensation

Accepting equity as part of a compensation package comes with distinct advantages and potential drawbacks. On the positive side, equity offers the potential for significant financial upside. If the company grows and eventually goes public, is acquired, or has liquidity events like tender offers, early equity grants may increase in value, although no gains are guaranteed. Equity also aligns your incentives with the company's success, fostering a sense of ownership and shared purpose.

However, equity compensation carries inherent risks. Private company shares are generally illiquid, meaning you cannot sell them to realize their cash value on demand. While there may be opportunities to sell private market stock through secondary marketplaces like Forge, subject to company restrictions and availability of eligible buyers, that still does not carry the same liquidity as public market shares. Employees at public companies who receive equity compensation don't have this exact risk, although there still may be more selling restrictions compared to non-employees. There is also valuation uncertainty; the company's share price could decline, rendering stock options worthless if the FMV falls below your exercise price, or reducing the value of restricted stock. Additionally, as the company issues more shares during future funding rounds, your ownership percentage may be diluted, which can reduce your total equity value or limit your participation in valuation growth.⁹ Finally, different types of equity trigger different tax obligations, which can be complex to navigate.¹⁰

How does equity compensation fit into your overall pay?

In addition to evaluating the different ways you might be paid in stock, consider how equity compensation fits into your overall compensation. That can include areas like:

• Base salary. E.g., $200,000 per year.
• Bonuses. E.g., 25% of your base salary if the company reaches its annual revenue goal.
• Paid time off. E.g., 15 days of annual leave.
• Retirement contributions. E.g., matching what you put into your retirement accounts up to 4% of your annual salary.
• Additional employee benefits. E.g., free daily lunch and 100% of health insurance premiums paid for.

Suppose the base salary at another company was $170,000 per year instead of $200,000. However, you had a bonus offer worth up to 50% instead of 25%, as well as 25 days of PTO instead of 15. In that case, you might consider these to be relatively equal pay packages or even prefer the lower base salary in exchange for more time off/slightly higher total pay potential with the bonus.

Adding equity compensation into the equation creates similar considerations. A base salary of $200,000 at a publicly traded Mag 7 company with $100,000 in annual RSUs isn't quite the same as a $100,000 salary at an early-stage private company paying $200,000 in stock options. Some might prefer the certainty of the higher base salary and the RSUs at the public company that have clear value after vesting, but others might be willing to take a chance on the early-stage private company’s upside. It's not unheard of for some early employees to see exponential returns on their equity as the company scales, although that's not the norm. In reality, many employees end up never exercising their shares or see modest or no returns.

All these compensation factors can add up, but it’s up to the individual to evaluate these different areas to see what may align with their preferences and goals.

How much is equity compensation worth?

The more clarity you have on the financial value of equity compensation, the more easily you can generally evaluate job offers. You might be willing to take a large percentage of your compensation in stock options, but then how do you compare one equity offer to another?

Some of the top ways to evaluate equity compensation include the following:

1. Review the current valuation of the company or that of competitors. For private companies that do not have real-time valuations based on stock trading the way that public companies do, data such as recent funding rounds may provide directional insights. You may be able to find funding information and other private market data on Forge. If you identify that the company you're receiving an equity offer from has had a steadily growing valuation, or if competitors have had an upward trajectory, for instance, that might give you additional context when evaluating offers, although keep in mind that past results or historical trends do not guarantee future results.
2. See what peers have received in terms of equity compensation. Ask friends, look at sites that share compensation data like Levels.fyi, ask within online groups (assuming you're not encouraging anyone to break a confidentiality agreement, for example), etc. There's no guarantee the end values will be the same, but you can at least see if you're getting comparable opportunities from the outset.
3. Consider your outlook for the company in relation to your risk tolerance. You might be willing to adjust some compensation levers based on your perception of the company, such as your estimation of an IPO likelihood, and how that may align with your situation. For example, you might consider factors such as what the company has done in the past and what executives might have said about going public. Past tender offers, although not a guarantee of future ones, might also give you more confidence in liquidity potential vs. a company that has not had any tender offers and has not expressed interest in going public.

In addition to assessing the overall value of the stock options, consider factors like the vesting schedule and what would happen if you leave the company before exercising your options. Many companies have a 90-day window for you to exercise your options after your departure, but if they have a longer period, that might make the equity compensation more valuable to you, since it gives you more financial flexibility.¹¹

By taking these steps and seeing how equity compensation fits into your overall offer, you can more easily determine if you're getting a deal you’re comfortable with. And the more transparency you have into private market compensation and valuation trends, the better prepared you'll be to negotiate for more equity compensation at private companies.

When it comes to negotiating equity compensation, there's often information asymmetry between employer and employee, especially at private companies. You don't always know as much as the founders do about company valuation and paths to liquidity, so it can be difficult to know if you're getting the deal you want.

But that asymmetry is changing, amidst greater private market transparency from marketplaces like Forge. And as we'll explore in more detail here, job seekers can negotiate many different components of an equity package, which all add up to getting equitable compensation.

What are the components of an equity package that factor into equity comp negotiations?

To figure out how to negotiate equity compensation in a way that maximizes its value to you, consider the different components of an equity offer, such as:

• Type of equity compensation. E.g., RSUs vs. stock options. This may or may not be negotiable, but it can inform what seems like a fair value. RSUs generally have less risk than stock options, as RSUs can retain value even when the company's valuation falls below what it was at the time of the grant. So if you're getting stock options rather than RSUs, you might try to negotiate for more options, for instance, to increase your upside potential.

• Number of shares/options. The number of shares/options you can convert to shares directly affects how much you stand to gain if the share price increases. 100 shares at $100 per share equal $10,000, whereas 200 shares at $100 per share are worth $20,000. And the number of shares you have, divided by the total number of company shares, gives you your percentage of equity ownership.

  So, you might negotiate for a higher number of shares/options to reach a higher ownership percentage. When evaluating an equity offer, consider understanding whether your equity stake is being calculated as a percentage of the company's fully diluted capitalization or its outstanding capitalization, as this distinction can affect how your ownership percentage may change as additional shares are issued in the future.

  Outstanding capitalization equals the number of shares that have been issued to date by the company (aka shares outstanding). Meanwhile, fully diluted capitalization equals shares outstanding plus shares that are reserved for future issuance but haven't been issued yet by the company (e.g. shares set aside for future employee grants, shares promised to investors through convertible notes, warrants, etc.) In other words, if you only negotiate a percentage based on outstanding capitalization, you could get immediately diluted if the company issues a large amount of equity right after your start date.¹²

• Fair market value of the company. This valuation is often used to set your price per share or exercise price. You also can use it to calculate your equity's value, such as if you know the percentage you're being offered. Owning 1% of a company valued at $10 million, for example, equals $100,000.

  Even though this amount isn't directly negotiable, it can help you understand the value of an equity offer. A higher valuation than you anticipated, for example, might make you more willing to take a lower equity percentage in the company. Past funding rounds and private market databases like Forge can help you determine valuations at private market companies, whereas public market companies have readily searchable public valuations.

• Exercise price. Also known as the strike price, this is what you would pay per share to exercise stock options. For example, an exercise price of $1 per share means that if the company's stock price reaches $2 per share, you could exercise your options to receive shares worth twice as much as you paid to obtain the shares.¹³ Because this is generally set based on the FMV at the time of the grant, it's typically non-negotiable. But again, this might affect other aspects of your negotiation. A high exercise price, for example, might prompt you to push for a longer post-termination exercise window, giving the stock more time to potentially rise above the strike price.

• Vesting schedule. The vesting schedule sets the timeline for when you own equity or options. If you vest 20% per year, for example, then you might decide to stay with the company for at least five years so you can own 100% of your RSUs or stock options.¹⁴

  While you can try negotiating for a shorter vesting schedule (not because you're planning to leave the company soon but because you want to decrease risk and cash in sooner), companies might have set policies. If everyone has a five-year vesting schedule, for example, that business might not be willing to set yours at four. Still, it may be worth discussing.

• Expiration date. You might not be able to sit on your stock options forever. Instead, you might need to exercise them before the expiration date, which might be 10 years or so, before they expire and lose their value.¹⁵

  Also, stock options can expire when you leave a company. That's often 90 days, meaning you'd have to decide during a short window whether to exercise them, perhaps even before they've reached your exercise price.¹⁶

  Here too, there could be some room for more negotiation around a longer expiration date. A company may say they only allow 90 days after separation date, but it's very common, and straightforward, for a company to extend this time period. Still, that decision could also be more of a companywide policy that won't be changed for one person.

How to navigate equity negotiations

Once you have a solid understanding of the overall value of your equity offer, you can figure out your negotiation approach. Like with salary negotiations, try to keep the conversation based on data and the value that you'd be providing to the company by working there, rather than personal reasons.

Suppose you asked for additional shares because the base salary isn't enough for you to save for a down payment on a new home. While that might be true, consider how that seems from the employer's perspective. Why should they do what seems like a favor to you by increasing the equity compensation so you can meet your personal goals? With that in mind, it may be helpful to frame the discussion around market data, comparable compensation packages and the overall value of the role.

Similarly, you might not want to be as frank as to say that you want a shorter vesting period so you can move on to the next startup sooner. Instead, you might ask how the company arrived at its current vesting schedule and see if the employer would agree to a shorter vesting period to make up for, say, a lack of bonuses that similar companies offer. While vesting schedules are generally meant to be a retention tool, employers may be sympathetic to the financial risk of multi-year vesting.

And while you don't necessarily want to take a low offer that doesn’t align with your goals, remember that your equity compensation negotiation doesn't have to end with your hiring.

If an employer doesn't have much room for negotiation initially, you might agree to revisit the conversation after your first year. While there's some risk on your part that nothing will change, the upside could be that the company is in a better place the following year to grant additional shares, for example.

Another option could be to work out performance-based equity bonuses. If an employer can't match cash bonuses that similar companies offer, perhaps they can agree to additional stock grants, such as with each subsequent funding round at a private market company.

In that case, however, keep stock dilution in mind as the company grows. You can look at databases like Top Startups to get a better sense of what equity grants look like at different funding stages.

Making the most of your equity compensation

Evaluating and negotiating equity compensation requires a clear understanding of the company's valuation, your specific grant type and the broader market context. While information asymmetry has historically made this difficult for employees at private companies, growing access to private market data is changing the landscape.

By leveraging transparency into private company valuations and market trends, you can make more informed decisions about your compensation package and advocate for fair terms. For those holding or evaluating private company equity, exploring a private marketplace such as Forge can provide valuable pricing insights and potential liquidity options, subject to share availability and applicable eligibility requirements. Create an account to explore private market data that may help inform your offer evaluations.