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How to decipher the stock options in your offer letter

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

Looking for a bit of guidance here as I’m unfamiliar with stock options. I received an offer letter from a Series A-stage startup that’s offering me stock options. Here’s the language from the offer letter:

“Subject to the approval of the Company’s board of directors, we are pleased to offer you a long-term incentive (LTIP) in the form of stock options in [redacted company name] equal to the value of $50,000 at fair market value of the company. Options vesting begins 1 month after employment over 4 years with a 1-year cliff.”

Questions:

  • Why should the stock options be subject to approval? Shouldn’t they be approved before I sign the offer letter?
  • Anyone have a clue how my stock options will be taxed? When I exercise, or when I vest?
  • It seems strange to offer a dollar figure for the option value, rather than a number of shares. Is that common?
  • There is no strike price included. I feel like I should also know what % of the company $50,000 in stock options would represent.

The offer letter seems too generic to me, and based on the company’s latest funding, $50,000 in stock options seems incredibly modest, particularly if I don’t know if that’s $50,000 in stock options at today’s valuation or $50,000 worth of stock when I vest. Help!

- Anonymous

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Dear Anonymous,

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

I’ll briefly step on my soapbox to say that your question perfectly demonstrates a persistent problem among startups — very few startups do a good job explaining stock options in their offer letters, and even fewer explain stock options during employee onboarding.

That’s one of the reasons why we see so many startup employees making avoidable mistakes with their stock options. The burden of stock options education falls, almost universally, on the individual employee, rather than the company granting the stock options. It’s a problem we’re actively trying to solve at Secfi. OK, stepping off my soapbox.

The good news is that you’re asking all of the right questions. You’ve done your research and you very likely understand the shortcomings in your offer letter better than the average person at your future company.

Answers:

  • “Subject to approval” is standard boilerplate language contained in every offer letter I’ve seen. No red flags there.
  • Most stock options are taxed twice. Once, when you exercise your shares, and again when you sell them. How they’re taxed, and how much you’ll owe, depends on which type of stock options you’re earning.
  • I agree that it’s uncommon to list the value of your stock options in an offer letter, rather than the total number of shares, type of stock options and strike price. It appears that you’re earning $50,000 worth of stock options at their current value (rather than the value when vested), but you’ll want to double-check with your recruiter or HR rep to be sure.
  • Strike price matters (somewhat) — remember, all things being otherwise equal, 5 million shares at a strike price of 5 cents per share is worth the same as 25,000 shares at a strike price of 50 cents per share. Your percentage equity stake is a somewhat more valuable measurement of total value, although it’s common for your relative equity stake to shrink as your company raises new rounds of funding — again, a totally common occurrence.

Beyond the somewhat confusing language in your offer letter, it also sounds like you’re disappointed with the total value of your equity offer. If this is a role that you’re otherwise excited about, I’d suggest sharing with your recruiter that you’d like to earn more equity. There may be the opportunity to negotiate more equity now that you’ve advanced to the offer stage.

If you’d like to read a bit more about negotiating equity during the offer stage, check out our article that details 11 questions to ask about stock options when joining a company.

- Vieje Piauwasdy, Director of Equity Strategy, Secfi

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

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