Your comp questions answered: Stock and RefreshersFeatured

Hi Everyone! I'm going to be writing about compensation here each month. A few weeks ago I asked you what your top compensation questions were. You all shared really thoughtful questions, many of which were about equity based comp. So today, I’m going to answer questions about stock as a component of total employee compensation. Let’s start with the basics.When you get stock in a company as part of your compensation package, it usually comes as either options or restricted stock units. An option is the right to buy shares of stock in the future, but at a set price. If the price per share changes in the future, the option gives the employee the right to buy the shares at that set price – the exercise price. Unlike stock options, an RSU is a grant of stock outright (https://blog.wealthfront.com/stock-options-versus-rsu/). There’s no requirement to purchase or exercise an option. RSUs are typically used at later-stage and public companies that provide stock grants to employees. Though all stock compensation has some risk – there are no guarantees – on the whole RSUs are seen as less risky than options. Certain roles, such as very high-level executives/officers, may receive shares directly vs RSUs, but this isn’t typically the case for non-founder/non-officer employees. Mature public companies also may have an Employee Stock Purchase Program, allowing employees to use part of their paycheck to buy stock at a discounted price. I’m not covering officer/founder shares or ESPP’s today, but wanted to mention them for completeness. I’m also not talking about taxation stuff related to employee stock today, because that is a whole other giant area. Both stock options and RSUs typically have a vesting schedule (https://carta.com/blog/what-is-stock-vesting/), as laid out in the company’s employee stock plan. The most common vesting schedule in startups is over four years, with a one year cliff. The cliff means that 25% of the shares are vested after the first year after the grant date, and the rest vest on a regular schedule (typically monthly or quarterly) for the rest of the vesting period. With a cliff, if you terminate employment before the cliff date, you forfeit all stock (or options) in the grant. In most cases, this means that if you don’t make it a year, you don’t get any stock or options – but if you stay for one year and a day on a four year vesting schedule with a cliff, you get 25%. Two years? 50% and so on. What are common stock refresher models?Thanks for this question, @sophiablistein!From a company’s perspective, stock grants serve a number of purposes. They help create a competitive compensation package while making cash reserves last longer. They give employees a chance to really share in the success of the company in the event of an IPO or acquisition. And finally, vesting stock grants incentivize employees to stay with the company for a longer period of time. But as initial hiring grants vest, the unvested portion of an employee’s stock grant dwindles – and without those future vesting dates, the incentive to stick around goes down.To counteract this, companies institute “refresher grants” as part of their compensation programs. A refresher grant may be options or RSUs, and is granted to an existing employee to reward performance and make their vesting runway longer. Companies typically set refresher grants as a percentage of how much stock a current new hire would receive for the same role. As early-stage companies mature, they typically shift to providing fewer shares in an initial stock grant, though the price-per-share is often higher. This means that while an early employee may receive a grant of, say, 1000 shares when they are hired, their refresher grant will anchor on how much a new hire would get – perhaps half that many shares. The most common refresher grant calculations for a four year vesting period kick in during year 3 of an employee’s tenure. Refresher grants are equal to 25% (one year’s vesting) of how many shares a new hire grant would get, and usually vest over two to four years. What should I expect from a stock refresher grant?Thanks for this question, Anonymous!You may not know what size of stock grant a new hire would receive for your current job. But if your company is doing well, you should expect that the number of shares will be a fraction of your initial grant – since new hires likely get fewer shares than you received a few years ago, and the refresher is a fraction of that! Also, the exercise price for your new grant may not match the grant you already received. It’s likely to be higher, if the company is doing well or has raised capital since you were hired.Some companies also like to provide extra grants to employees specifically to reward performance, outside the standard refresher grants. These performance or discretionary grants vary considerably, if your company uses them at all. How do I value my stock compensation, especially when comparing offers?Thanks for this question, Anonymous!Alas, there’s no simple formula for this. The closest you can do is make some conversion of the stock you’re receiving annually, add that to your cash compensation, and use that as an estimate. But there are some things to consider while doing this calculation. How much do you think a share is worth now? This is a good time to have a chat with recruiting at your company and ask them how they are positioning the upside of the stock to new hires. It’s recruiting’s job to paint a possible but very positive picture, so depending on how you feel about the company you may want to estimate using a per-share value somewhere between your exercise price and what recruiting is saying. For more information on this series and to submit your questions, check out the initial post here
I have two questions regarding stock in a recently IPO’d company. 1. I heard that one of our executives knows I’m being pursued by other companies and is negotiating a new offer to keep me at the company. I won’t have the new offer for a couple weeks, however I do know that the executive is trying to secure a stock refresh in the form of RSU’s since we’re now a public company. However, HR is arguing that the stock refresh should be ISO’s. Obviously RSU’s are preferable, as our stock will likely increase but is already at a fairly high stock price and I can’t imagine the strike price will be much lower than that, if at all. RSU’s would clearly have much greater value. If HR indeed tries to give me ISO’s instead of RSU’s, what are the other negotiating levers I can pull? How common are RSU’s for stock refreshes?2. I participated in our first ESPP, which was very lucrative since our stock has doubled since the IPO, I put in 15% of my paycheck and got a 15% discount on the IPO price. I have to make a decision about if it’s worth investing in the second round of ESPP and if so, how much to invest. 15% of my paycheck means I can pay my bills, contribute to 401k, but can’t save much beyond that (I already have an emergency fund, luckily). Our stock will likely increase at the end of the 6mo ESPP period, but it’s not clear by how much and obviously the market is volatile. Is there a good rule of thumb for figuring this out?
graceyoung's profile thumbnail
Why do you say “obviously, RSU’s are preferable?” It’s not obvious, especially since you’d get more options if you’re getting ISO’s, and ISO’s are advantageous from a tax perspective.
jennordhem's profile thumbnail
this is so helpful, and i’d like to dive in deeper with the links you referenced. can you update the links into hyperlinks so they are clickable on the app? thanks!
cadran's profile thumbnail
ah that looks like an issue with the mobile app! working on a fix now.
cadran's profile thumbnail
ok you should be all set on the links now!
bethanye's profile thumbnail
Thanks for fixing me up, @cadran!
Hi Bethanye,My company went public last year (yay!) and the lockup is now over so I am trying to decide how much to exercise and when. I know this is a very tricky question and highly dependent on ones situation and risk level. How would you advise going about finding a CPA or advisor? I’ve heard such mixed advice. Trying to figure out taxes + exercise cost and including things like potential bonuses this year and ESPP is getting quite complicated. Kicking myself for not doing early exercise but I didn’t have cash to pay taxes on all the shares upfront.
EvaArh's profile thumbnail
Thanks for the article!What do you see as a best practice for vesting equity comp if someone switches to a part-time role (e.g. after parental leave)?