A lot of people going into the agency business don’t realize that they can negotiate an agency’s offer of employment. Worse still, they sign employment agreements without fully understanding all the terms, particularly when agencies offer equity. Let’s tackle these problems one at a time.
People starting right out of college are going to find that their negotiating power is a great deal less than those with experience. It’s easy for an agency to argue that fresh college graduates are relatively interchangeable and, therefore, don’t warrant differentiated compensation. You might be able to negotiate some extra vacation time or perhaps a moving bonus, but don’t push a potential employer too far if this is your first job.
The first thing you want to do is ensure your negotiations are fair. If you are negotiating directly with the employer, that’s probably fair. If you are negotiating with the employer’s hired recruiter, this is putting you in a weak position. The recruiter is generally not authorized to make many concessions. This means that you wind up getting a lot of sympathy from the recruiter, but little movement from the original offer. If the company does this to you, have the recruiter talk to someone who you hire for yourself. It’s worth the extra money to hire your own representative — a lawyer who understands compensation equity is usually a great choice.
It’s important to realize just what is negotiable. Almost all employers have limitations, certain areas where they simply aren’t able to budge. For instance, if a company’s board of directors vote on a very particular kind of equity compensation plan, it’s extremely unlikely they’re going to change it just to accommodate you. Sometimes these plans have discretionary flexibility, but often they do not. Finding out the areas in which the employer can be flexible will put you in a very powerful position.
These items are generally negotiable:
- Signing bonus
- Moving bonus
- Vacation time
- Computer allowance
- Hours or days worked
- Quantity of equity offered
These items are typically written in corporate stone:
- Health benefits
- 401(k) and other retirement plan benefits
- Terms of equity offered (we’ll go into this later)
I recommend a compensation-package negotiation strategy where the potential employee makes the first offer. Make it high. I don’t know of an employer who will completely break off negotiations just because the first offer was much too high. There will be a counteroffer.
When that counteroffer comes, you now know the difference between your desired pay and the package the employer would like to offer. Your next step is to bridge the gap by filling it in with things in which the employer has great flexibility.
The scenario would work like this:
- You suggest the employer should pay you $100.
- The employer expresses surprise and disappointment at such a high suggestion. He or she was thinking more along the lines of $75.
- You express disappointment, but ask for confirmation that he or she has some flexibility in some other areas, like the equity side of the package.
- You counter with $85 and an increased equity package that would make up another $15.
- You accept the employer’s next counteroffer of $75 and $10 in equity.
Few people truly understand this area, so don’t be intimidated by it. There will be a lot of confusing legal and financial language. Here’s the simple version.
Companies will give employees the opportunity to purchase company stock at a set price. Note that this is different from just giving away stock, which is seldom ever done. This kind of benefit is called an option plan. There is a very particular formula to it.
Each of these companies has a set number of shares of stock associated with it. And each of these companies has a financial worth called a market capitalization. When you divide the “market cap” by the number of shares out there, you get the price for each share. So far, it’s a simple algebra equation: price = market cap w shares.
The option plan will let you purchase shares after a certain amount of time spent at the company. This is the vesting schedule. Most plans I’ve recently seen require that you work at the company for at least a year before any of these options actually become yours. Most companies will grant you the options over a period of about four years.
When you do “exercise” the options that you have earned, you are not given shares of stock outright. Instead, you merely have the right to purchase them at a special (hopefully, by this time, very cheap) price. That price is called the strike price. It surprises a lot of folks who suddenly realize later that they have to pony up serious money to buy their stock.
Here’s an example:
- Company gives you options to purchase 1,000 shares at a strike price of $3.
- At the time you start work, the stock is worth $4 per share. The theoretical benefit at that moment in time is $1,000.
- A year goes by, after which you are entitled to one quarter of your options. You decide to exercise them, paying $3 times 250, or $750.
- But in that intervening year, the stock price has gone up to $8, which makes that equity worth $2,000. You make a profit of $1,250.
- Three years later, you’ve vested all of your equity, but you decide not to exercise any additional options because your company’s stock is now at $2.50 per share. We call that being “under water,” where it costs more money to exercise the option than the underlying stock is worth. You generally do not have to exercise your options.
Different option plans might differ from this structure. Certainly the tax consequences of all this will vary based on all sorts of factors, so it’s best to get professional help when the time comes.
Unfortunately, to negotiate intelligently about equity you need some very specific information. You MUST know the strike price of the equity. And you MUST know the number of outstanding shares. Without these numbers, you will be unable to calculate the potential value of the offered options.
I see a lot of companies spewing out employment offers with equity options for tens of thousands of shares. It looks very generous until you realize the company has tens of millions of shares, and each is worth very little. If they involve a high strike price, they stand a great chance of never being worth much at all, no matter how many of them they give.
Worse, sometimes the person with whom you’re negotiating doesn’t know these numbers. He or she may never have asked these necessary questions when first hired. Do not accept an equity package without knowing these numbers. Or, if you do, assume the package is worth nothing.
Do make sure that in the course of the negotiations, you treat everyone with respect. There is never a reason to be impolite. You will likely have to work for these folks, so make sure you don’t give them second thoughts. This is one reason why some argue that it’s always good to go through a recruiter or a set of third parties.
You will likely learn a lot about your company during these negotiations. How flexible will the company prove to be in the future? How much authority does your direct supervisor really have? How does the venture value its employees? I’ve always found that my later discoveries about the personality of a firm have been foreshadowed by the nature of the negotiations.
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