(This is part 3 of the series on Evaluating and Negotiating Job Offers. You may also find these other parts interesting: Part1: Base Salary, Part2: Signing Bonus and Relocation Benefits, Part4: 401K, Part5: ESPP, Part6: Other Perks).
The next aspect we look at is the Stock Options or Restricted Stock Units (RSUs).
What are stock options or Restricted Stock Units (RSUs)?
This is one of the additional perks an employer might offer you as part of your package. Stock Options let you buy a certain number of shares of the company at a pre-determined price, that you can exercise at a later date. The pre-determined price, called the “strike price” or the “grant price”, is usually the price of the shares on the day it was granted (generally, the day you join). For example, a company may offer you an option to buy 1000 shares and on the day you join the price is $5. Then the “strike price” of the shares is $5. Five years down the line, say you want to exercise your options. On that day, say the price of the share is $55. Then, you make a profit of $50 per share, and if you exercise all your options, you will pocket $50,000 (minus the taxes, of course).
However when the stock market crashed a lot of stock options went under — the current (and expected short-term future) price of the stocks were far less than the strike price, making them worthless. So, some companies switched to Restricted Stock Units (RSUs). Restricted Stock Units are stocks that are granted under certain conditions that limits your ability to exercise them immediately. But unlike the stock options, the RSUs are completely paid for and when you sell them, whatever you sell them for, is what you get to keep.
Setting your expectations
I know that some sort of stock options or RSU are fairly common for jobs in the tech industry. I am not sure if other type jobs offer options. During the dot com boom days, it seemed like the only way the price of shares can go, is up. So, employer used the options to entice prospective employees. When the stock market crashed, not many companies, even in the tech industry, offered stock options since they are not attractive anymore. Now, some of the companies offer RSUs, but it is not as common place as before. So, set your expectations according to the job you are applying for.
Stock options and RSUs are usually granted with a vesting schedule, typically spread over 4 to 5 years. Until they vest you will not be able to sell them. Thus, if you are offered 1000 shares with 25% vesting every year, then at the end of first year you can own/sell 250 shares, at the end of the second year you can own/sell another 250 shares and so on. If you leave the company before all your shares are vested, you forfeit any portion of the options that have not yet vested. If you are offered stock options or RSU, make sure to ask about the vesting schedule.
Also, remember, stock options are a bit of a gamble. When the shares eventually vest, if the price is not higher than your strike price, you will not be able to make any money from your options. RSUs are a much better option than Stock options. Even they are very dependent on the price of the stock when you sell them. So, do not count your chicken before the eggs hatch.
Unless there is a high probability that the company you join is bound to do well a few years down the line (say, you are evaluating an offer from google or apple), you should not focus too much on negotiating stock options or RSUs or consider it a major factor while evaluating multiple job offers. If the company gives you some options, great, take it. If not, focus your negotiation efforts on other aspects of the offer that are less risky. Better to have a bird in hand, than two in the bush.