Author Topic: How to value equity vs cash in job offer?  (Read 457 times)

pound_foolish

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How to value equity vs cash in job offer?
« on: May 20, 2021, 07:53:25 AM »
I'm currently on the search for a new job (in tech), and a lot of the companies I'm talking to would lead to me taking a reduction in cash compensation (base salary + bonus; several don't even have a bonus at all), but an increase in total comp when taking equity into account. Of course, the problem with equity is that the value it's given today in my offer may be an over (or under) statement of its actual value by the time I hit the vesting cliff (generally 1 year). My gut instinct would be to value it at half of today's value, at least for planning purposes.

A secondary factor, which may be its own question, though it feels related to me, is that we're currently running a very tight budget in relation to what's coming in every month (not counting my current bonus), so I'm a bit concerned about betting too much on a future value on a specific vesting date.

How would you fine people value equity when comparing job offers?

youngwildandfree

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Re: How to value equity vs cash in job offer?
« Reply #1 on: May 20, 2021, 08:07:31 AM »
I personally value them at zero dollars. That doesn't mean I don't consider it part of the package. But equity is similar in my mind to the size of the company, flexibility in working hours, etc. More equity is in the pros column, but I do not include those dollars in any financial planning because there are too many unknowns.

If you are currently not comfortable with the cash in budget, accepting an offer based on equity sounds like a way to end up frustrated and bitter if things don't work out perfectly.

Rdy2Fire

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Re: How to value equity vs cash in job offer?
« Reply #2 on: May 20, 2021, 08:12:00 AM »
I WOULD NOT value the equity at all. I have won (not huge) and lost on equity and the last few jobs I negotiated for that had an equity component I was very upfront with them that I don't really consider this in my offer.

My reasoning is simple, a bonus or stock options or even profit sharing is all WHAT IF. I have taken jobs where I was told I was 'eligible' for up to a 40% bonus and the most I ever received was 10.5% with many years it being 0% although the company was doing well. Stock options, worked for a couple companies that gave them, one 25K pre-ipo shares, sounds great unless there is never a value, had another where the company ended up going bankrupt although the tech was very good. FYI all my jobs were tech as well.

So when I negotiate a job offer, I am negotiating the salary you are paying me for my worth in regards to the job you want/need done. The future, none of us know, as part of that offer you want to give me some equity, bonus dreams etc that's great but I still want/need to make $X a year.

Granted if you are looking for 100K and they offer 95K and a ton of potential that might be worth a gamble. If they offer you 80K and try and sell you on TOTAL COMP (part of which is options, potential bonus) then I'd say no. Also if it's a sales type roll with a comp split, I'd always try to get as close to my bottom number on the guarantee and depending on the volatility of the company/product, negotiate the split %

ender

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Re: How to value equity vs cash in job offer?
« Reply #3 on: May 20, 2021, 08:15:48 AM »
What type of equity?

An RSU grant is a lot different than a series-A startup equity grant.

I generally discount RSUs/bonuses to 70% of value. Pre-IPO equity I would value significantly lower, but not at $0. The closer I feel the company is to IPOing the smaller the percentage I'd discount it but pre-IPO equity is all a gamble. Just sometimes less of a longshot.

pound_foolish

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Re: How to value equity vs cash in job offer?
« Reply #4 on: May 20, 2021, 08:29:58 AM »
What type of equity?

Sorry for under-specifying. This would be RSUs in publicly traded companies. Most of them are 1-3 years out from their IPO.
« Last Edit: May 20, 2021, 09:48:07 AM by pound_foolish »

seattlecyclone

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Re: How to value equity vs cash in job offer?
« Reply #5 on: May 20, 2021, 09:43:58 AM »
What type of equity?

Sorry for under-specifying. This would be RSUs in publicly traded companies. Most of them are 1-3 years our from their IPO.


If they're publicly traded, I'd value them at their current value, but with a giant confidence interval. Part of that confidence interval will likely result in a pay cut. That's the risk you take.

yachi

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Re: How to value equity vs cash in job offer?
« Reply #6 on: May 20, 2021, 12:01:07 PM »
If it's a large enough publicly traded company that it's on the options market, you can buy puts to protect you from loss.  I would expect you could limit your losses to maybe 25% of the current trading price, depending on the company.
Here's an example using Google:

If I was given Google stock at my job today, it would be valued at $2,347.86, because that's what it's trading for.  I wouldn't normally own Google stock, as it's too big a risk to own individual stocks.

I have no opinion on the movement of the stock, but I want to minimize my losses, so I buy a put that allows me to sell the stock after my holding period for close to it's current trading price.  Today there is a June 17 2022 Put for $2350, with an ask price of $267.90.

The $267.90 cost of this put is the cost of your insurance against the price going down.

I buy $267.90 puts to cover my company-gifted stock today.  If my stocks vest May 20, 2022, I can sell them between May 20, 2022 and June 17, 2022 for $2350 by exercising my options.  If the stock is trading higher than $2350, I can sell them instead on the open market.

This is called a 'protective put' because it protects your stock position against loss.  In this case, the protective put cost me 11.4% of the value of my company-gifted stocks.  So the most you stand to lose is the 11% cost of the put it today's price doesn't move much.

seattlecyclone

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Re: How to value equity vs cash in job offer?
« Reply #7 on: May 20, 2021, 10:24:40 PM »
I have it on good authority that if you were paid in Google stock the terms of your employment would prohibit you from doing any sort of derivative trading in that stock: no shorting, no options, no long trading outside the prescribed trading window each quarter, and then only if you possess no material nonpublic information. This sort of policy is hardly unique. Before you implement some sort of protective options strategy related to your equity grants, make sure your company doesn't have any rules against it.

lutorm

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Re: How to value equity vs cash in job offer?
« Reply #8 on: May 21, 2021, 12:20:54 AM »
Yeah, if it's an RSU in a stable publicly traded stock I'd value it at face value. It's true that if the company does poorly in the future, the value might go down. If the company does poorly, they might also let you go, too, so it's really not much different from cash that way.

It's really a question of whether you value the potential upside more than the certainty. Certainly the risk/reward proposition is much closer to cash than being offered ISOs in a privately held company... That I would value at close to zero.

Rdy2Fire

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Re: How to value equity vs cash in job offer?
« Reply #9 on: May 21, 2021, 06:09:58 AM »
Yeah, if it's an RSU in a stable publicly traded stock I'd value it at face value. It's true that if the company does poorly in the future, the value might go down. If the company does poorly, they might also let you go, too, so it's really not much different from cash that way.

It's really a question of whether you value the potential upside more than the certainty. Certainly the risk/reward proposition is much closer to cash than being offered ISOs in a privately held company... That I would value at close to zero.

I would agree with this but with 1-3 years vesting also mean you have to be willing to commit to the gamble of, will you make it 1-3 years. All brings me back to my response of I value(d) at or close to $0 when looking at it from an annual compensation perspective. RSU/options with vesting terms, bonus potential, are all just potential earnings so when figuring in your annual comp they don't mean much. Definitely can factor it in if you know you're definitely staying 3 years but the value is obviously still unknown