Many companies today offer equity in the form stock options and/or restricted stock as part of a new employee’s compensation package. This is particularly true if the company is a “start-up” that uses equity to entice you to take the position because it does not have the cash flow to pay employees the salaries they deserve.
Before accepting the position, employees should carefully read the company’s equity plan and any stock agreements they will be asked to execute to get a sense of their rights in the event the relationship terminates or the company experiences a corporate event such as a sale or merger. Any opportunity to negotiate the details of your equity award takes place before you join the company, so make sure you do your due diligence.
Areas of concern to look for when reviewing the governing equity documents include:
- What happens to your unvested stock when if you are terminated?
- How long do you have to exercise your vested options if you are terminated?
- What type of options are you getting? Non-qualified or Incentive?
- Are they Options or Restricted Stock?
- Is there any protection against dilution?
- Does the company have a right to buy back any vested stock or restricted stock upon my termination, and at what price?
- What happens to my equity interests upon a Change of Control?
- What the tax consequences are of the deal you are about to strike?
- Does the equity plan allow for cashless exercise so that you do not have to come up with any money to purchase your vested options?
If you are not comfortable reading the plan, it is reasonable to ask the company to speak with someone who would be able to answer these questions. Options are a wonderful compensation incentive tool and, with just a bit of knowledge, you will give yourself the best opportunity to reap their rewards.