Questions to Ask When Your New Job Offer Comes With Equity

Ask these key questions.

It's easy to get distracted by the promise of a life-changing number, but when it comes to equity compensation, there can be a lot of caveats.

People often think more about the money they could make instead of the company's health and stage of development, said Daniel Eyman, the founder of Meld Valuation, a company focusing on business valuation and securities analysis.

Early employees can expect to earn more equity than those joining at a later stage, giving them a larger potential upside should the company succeed.

Regardless of when you join, Eyman recommends asking future employers about their cash runway and fundraising plans. "I would want to understand the risk level I'm getting into," he says.

Eyman also recommends negotiating the equity compensation portion of your offer, especially in today's tight labor market. "A lot of companies have standard percentages, but everything is negotiable, especially at a startup and at executive and managerial levels," he says.

Andy Leung, a private wealth advisor with Procyon Partners in Connecticut, suggests asking yourself some questions as well. Chief among them: How much less would you be willing to work for should your options be rendered worthless or the company's stock price plummet?

Know what you're getting.

Stock options, restricted stock, and employee stock purchase plans are three common ways companies compensate employees with equity.

Stock options allow recipients to purchase a specific number of shares of the company's stock at a predetermined price. Options come with expiration dates and while they can generate exponential gains, they don't always deliver.

If your company's stock soars, you may find yourself building your portfolio at a significant discount. But if your company's stock price slides, you may never be able to take advantage of your option to buy shares at a discount.

"Options can have zero value," Leung says.

Restricted stock units carry less risk because they're actual shares of a company's stock. They could end up being worth less than you had expected if a company's share price falls, but it's unlikely you'll walk away with nothing.

Employee stock purchase plans are different from both RSUs and stock options in that they allow employees to buy shares of their company's stock at a discounted price through payroll deductions.

Know when you get it.

When you're being paid in equity, don't expect to be handed a chunk of the company on your first day and don't expect to get anything if you leave in less than a year.

Equity typically vests over a set period of time, often between three to five years, according to the financial services company Charles Schwab. At companies on the verge of going public, employees may not see their shares vest until 180 days after an IPO.

If your company uses a four-year vesting schedule, you can expect to receive 25 percent of your equity compensation with the first issuance after your first anniversary.

If you leave a company with stock options in hand, you may have to exercise them within 90 days of your departure.

Prepare to complicate your taxes.

You may have been issued stock instead of cash, but you'll still have to pay taxes on that portion of your compensation.

Stock you receive as part of your compensation is taxed as ordinary income, just like your paycheck. You can expect to be taxed on the value of shares you receive at the time you receive them. If you hold onto those shares, you may pay additional taxes on your investment gains.

Companies often hold back a portion of your shares to cover the tax liability, just as they withhold funds from paychecks to cover taxes, Social Security, and Medicare.

Think about your big picture.

There's a reason "don't put all your eggs in one basket" has become such a well-known cliche. It's true, especially when it comes to your money.

"The big mistake people make is letting equity ownership be too large a share of their net worth," Morningstar's Benz says. "You already have a lot of economic wherewithal riding on the fortunes of the company with your salary."