New Job Offer? These Are the Equity Questions You Need to Ask

Thankfully, it’s becoming standard in Europe for startups to offer equity as part of the compensation package for new hires. But too often, we hear from startup employees that the information they’re given by companies through the hiring process and at the offer stage is insufficient to really give them an insight into what their equity stake really means. Simply having an arbitrary number of options on the table isn’t enough to make a really informed decision, and many people still have open questions about equity even with an employment contract on the table. That needs to change.

Everyone wants to impress their potential employer, and people don’t want to ask ‘silly’ questions. But depending on the company’s performance, your equity might make up a significant proportion of your total earnings. So you need to know what those numbers in your offer letter or employment contract really mean. That’s why we’ve provided a checklist of the key questions you need to ask through the recruitment process and at the offer stage!

Calculating the value of your equity stake

You’ve got an offer to join delivery app BigFood. Congrats! Your option grant includes 10,000 share options, vesting over four years. But beyond that, you don’t have too much information. Here are the questions you need to ask in order to make a properly informed decision on your compensation.

What’s the company valuation my equity stake is based on?

There isn’t much point in disclosing the number of share options you’ll be granted if the company doesn’t also disclose what those shares are worth. And one of the ways you can get that data is by asking for an up-to-date company valuation.

If your new employer is VC-backed, the latest valuation is likely to have been agreed at the most recent round of fundraising. But many companies also get regular valuations through the relevant tax authorities. UK companies can agree a valuation with HMRC with a VAL231 form. The US standard is a 409A valuation; many European companies also choose to undergo 409A valuation processes. (Ledgy partners with Deloitte and Aranca to offer robust valuations for our customers.)

Your new company should be prepared to disclose an up-to-date valuation (within 12 months) with you. If they aren’t doing regular valuations, don’t know the figures, or won’t share them, that’s something for you to bear in mind as you make your decision on your next step.

Percentage ownership: how much of the fully diluted share capital will I own?

Alongside the company valuation, it’s important to understand how much of the company’s fully diluted share capital you stand to own once all your shares and options have vested. Fully diluted share capital refers to all the common shares in a company, including ones that have been issued and the options or warrants that could be exercised in the future.

Being granted startup equity has to be more than a nice gesture, especially if it’s presented as a major part of your compensation. Understanding what proportion of the business’s total shares you’ll own will help you stay informed as the company valuation changes over time. Again, your new employer should be happy to provide this information to you.

Understanding the plan details

Fantastic – you’ve put a price on your shares’ potential value. But you should also seek out more detail on the share plan you’ll be enrolled in. Here are some more questions to give you clarity and confidence in your equity offer.

What type of equity scheme am I enrolled in?

Companies can use a variety of different employee share schemes that might have an effect on your equity stake. For instance, your share plan might be an ESOP (employee stock ownership plan) or a VSOP (virtual stock option plan). ESOPs can vary greatly from country to country, and countries in turn can offer companies different kinds of ESOP. RSUs (restricted stock units) are the standard model in the US. In the UK, for example, early stage UK companies that meet certain criteria can use the highly tax-advantaged EMI options scheme, whereas companies that don’t qualify or don’t want to jump through so many hoops might prefer a growth share scheme.

Learn more about employee stock ownership plan management software.

In other markets, most prominently Germany, you’re more likely to encounter a VSOP. Virtual shares – also known as phantom shares – give employees the right to benefit economically from their ownership stake in the company, without owning shares directly.

There are significant differences between these schemes. For example, in a growth share scheme, your share price has to clear a hurdle set by the board before employees can see any value from their shares. If you are being enrolled in a growth share scheme, it’s imperative to understand the current price per share and the hurdle price, so you can plan when you’ll see a return from your share ownership.

Another main difference between different share plans are your tax obligations. Under a VSOP in Germany, for example, employees pay no tax when they receive their shares. Under EMI and growth share schemes in the UK, employees pay no income tax when they sell their shares. But in a growth share scheme, employees typically pay capital gains tax of 20%, whereas capital gains tax for employees in EMI schemes is normally 10%.

When you know which kind of scheme you’re being offered, you can better understand future tax obligations and other restrictions. Again – if your prospective employer can’t or won’t explain these terms, you might not have all the information you need to make a really informed decision.

What is the strike price I’ll pay to exercise my options? Is it nominal, or will it increase over time?

The strike price is how much you pay to exercise (buy) your shares. You effectively pay a chunk of the share price but purchase the shares at a discounted rate, making a profit on the difference as the share price increases. (That’s the theory!)

How big your discount is can vary. Some employers peg the strike price to the company share price and/or valuation, which means it changes over time. Others put the strike price at a static nominal value – often 1p in the UK, and €1 in France or Germany. A nominal strike price is sometimes seen as a better deal for employees, so it’s worth asking how your new employer treats the strike price as the valuation changes over time.

Knowing the strike price is important because it tells you how much you’ll need to be able to pay to exercise your shares when they vest. A strike price that looks low on paper can add up when you multiply it by thousands or even hundreds of thousands of shares. If your 10,000 BigFood shares have an exercise price of £1, you’ll need to pay £10,000 to buy the rights to your equity when the time comes. Even if your shares are worth more than £10,000, that’s still a significant sum to pay in one go.

Many employers let employees pay for their shares in instalments, taken as deductions from their monthly salaries. But most people would still like to know in advance how much they’ll likely have to spend, especially since it could be enough to prevent you from benefiting from the shares you’ve earned.

What is my vesting schedule?

Details on how your employee stock options vest over time should definitely be in your offer letter.

The most common vesting schedule for employee equity is four years with a one-year cliff. Under this model, you receive 25% of your shares or options after one year, and the remainder in equal monthly instalments over the next three years, so that by the fourth year, all of your shares have vested.

Some larger companies adopt different approaches to vesting. For example, Snap back-loaded its equity so that employees saw 10% of their shares vest after the first year, 20% in year two, 30% in year three and 40% in year four. This incentivised team members to stay for longer to accrue the bulk of their equity. (Remember though, Snap is a public company, and this kind of treatment is much less common in early-stage startups.)

You can also ask about accelerated vesting: In the case of one or two pre-specified events, an employee’s shares vest immediately. It’s far more common to require two events—a double-trigger acceleration, as opposed to a single-trigger acceleration. Usually, these two events would be an exit and a redundancy. Accelerated vesting typically only applies to high-level executives or the founders, but you can ask!

Although vesting periods tend to be pretty standardised, you still need to make sure you understand the terms under which your shares will vest.

Planning for the longer term

Once you understand how much your shares are worth, when you’ll be able to exercise them, and how much it will cost you to do so, you can think about what your equity could look like in the longer term. (These questions may depend on the stage your prospective company is at. Early stage companies probably haven’t given as much thought to the longer term, whereas companies that have raised subsequent rounds of funding should definitely have some kind of structure they can point to.)

Are standard amounts of shares reserved for future grants?

Once you understand how much your shares are worth, when you’ll be able to exercise them, and how much it will cost you to do so, you can think about what your equity could look like in the longer term. (These questions may depend on the stage your prospective company is at. Early stage companies probably haven’t given as much thought to the longer term, whereas companies that have raised subsequent rounds of funding should definitely have some kind of structure they can point to.)

Do people keep their shares when they’re made redundant or resign?

It might be a little awkward to bring up your last day before you’ve had your first. But thanks to so-called bad leaver clauses, a lot of employees lose their shares when they leave for a new job. And with many tech companies facing lay-offs, you need to know if you’ll be able to benefit from the equity you’ve accrued if you’re made redundant—especially if you’re treating it as a significant part of your compensation package. Ask about any clauses in place that determine what happens to leavers’ equity.

In conclusion: the more you know, the better

Getting an offer letter or employment contract is always exciting. But it’s also the perfect moment to clear up any unanswered questions on your equity package.

The reason companies give equity to employees is because they want their people to feel invested in their work and to reap the rewards of their efforts. But many companies fail to transparently communicate some important details of share agreements. By running through our checklist, you’ll understand what your equity means for your overall compensation. Good luck!