When my stock options fully vest, is that the equivalent of a pay cut?

Question

Background

I am approaching the end of my vesting term of 4 years. The vesting plan follows a typical 4 year term, with 1/48th of the total options vesting every month (after the initial year-long cliff).

After the term ends, I will no longer be vesting any options, so my effective monthly compensation will decrease by 1/48th of the total value of the options.

Questions

1. Am I thinking about this correctly? If I'm just being greedy here, let me know.
2. Should this be brought up during salary negotiations with my company? For example, should I make an attempt to value the options and request an equivalent salary increase? Alternatively, could I request a new contract which basically continues vesting options at the same rate for another couple years?

More info

I work at a startup which has scaled - considerably but not dramatically - over the last few years. The company has more income, the odds of an exit event are greater, etc. 1% equity (made up number) in my company is worth more now than it was when I signed the contract. But it's very hard to quantify any of this even remotely accurately, except for the revenue which I do have some insight into.

I understand that stock options are, among other things, a way for startups to attract talent without being able to pay market rates for salary. To be crude about it, that part of the attraction finishes once the options are vested, except to the extent that continuing my work at the company will make the options worth more. But as the company expands, my ability as an individual contributor to increase the company's valuation diminishes.

So if the company doesn't share the view that a salary increase is warranted after the vesting period, that makes me more inclined to move to a bigger company, or find another startup, where I could command the same or better salary and maybe begin vesting options with them. However, I like working at my current company so I'd like to find a way to be content, either by negotiating a raise or by convincing myself I don't deserve one. I appreciate any insight on my thought process here.

Answer 1

Yes, you are thinking about this correctly, and are not being greedy.

If your options are fully vested and you are being paid a below market salary, then you have no economic incentive to stay at your current company. It would be in your best interest to get a new job at a market salary.

It is a common practice in this situation for companies to provide employees with more options to keep them at the company.

You can say to your boss that you are happy in your position and you would appreciate additional options as additional motivation to help the company succeed and to reward you for your tenure. This can be done in a non-confrontational way and is a win-win for you and the company, in that the company gets to keep a valuable employee.

Keeping good employees happy is very important at a startup.

Answer 2

Am I thinking about this correctly? If I'm just being greedy here, let me know.

No, you're not thinking about this correctly. You got a retention bonus, even if it was "sold" to you as some kind of compensation for lower salary. It is not your compensation for work, but rather compensation for staying with the company. Your work is not valued differently, but if you didn't continue receiving retention bonuses - your staying with the company is.

Should this be brought up during salary negotiations with my company? For example, should I make an attempt to value the options and request an equivalent salary increase? Alternatively, could I request a new contract which basically continues vesting options at the same rate for another couple years

Should is not a question anyone but you can answer. Could? Definitely. The company doesn't have to agree to any of those requests, of course.

Generally, it's a common practice for companies to offer continuous equity "refreshers" to ensure retention. If you were not offered one - I'd suggest thinking why. If you think that you can get better compensation elsewhere - get an offer and you can show it to your managers as part of your negotiations (however I'd advise to just move somewhere else where you'd feel appreciated).

Answer 3

In addition to what littleadv said, if the company does well, the actual monetary value of those options will grow over time, so you can continue to gain value from them. (Assuming you don't leave the company before its shares become tradable, of course.) So in some sense, you can think of it as a part of your compensation which is tied to the company's value, in contrast to your salary which is not tied to the company's value. The money you (could eventually) make from options comes primarily from an increase in the value of each individual share, not an increase in the number of shares available to you.

If it helps, you can think of the stock options as part of your compensation package at the time when you initially received the grant. Like, suppose there were no vesting period; you would be compensated with, say, a salary of $5000 per month plus some number of "conditional value-generating units" (i.e. stock options) which might gain you an additional $1000 (or $2000 or $10000 or whatever) per month over the long term if the company keeps growing. It's just that the company holds back your access to those "conditional value-generating units" for a while as a way of enticing you to keep working there for four years... but unless you were going to exercise and sell the options during those four years, it doesn't matter that they didn't become available to you until later, because you pay the same amount of money to buy the shares regardless of when you actually do it.

Answer 4

I work at a startup which has scaled - considerably but not dramatically - over the last few years. The company has more income, the odds of an exit event are greater, etc. 1% equity (made up number) in my company is worth more now than it was when I signed the contract. But it's very hard to quantify any of this even remotely accurately, except for the revenue which I do have some insight into.

Let me just point out that getting more shares at this point may or may not actually be a raise, depending on the outcomes of these shares. I don't know what your employer's rules are, but generally you are required to buy any vested shares you wish to keep once you leave the company (which might be a substantial outlay), and your ability to resell those shares is dubious at best. If you can't afford to (or choose not to) buy all of the shares at that point, the rest are forfeit, and wasted.

It is possible, therefore, that you might be taking a pay cut by being granted more shares if, in the end, you buy them but loose money on them, or can't afford them. Remember that there is no guarantee that the company will ever be liquid, and many companies go years without an IPO or other event, simply taking more rounds of investment and diluting the existing shareholders.

If you are happy with the company, you should certainly stay, but you might want to consider asking for cash, and playing the "I already took one for the team (in terms of taking shares instead of salary), now I want cash" card.