But those contemplating a change should remember that many job seekers have the upper hand in the labor market currently. That’s especially true in areas like investment banking, fintech and alternatives such as private equity and hedge funds, where employers are desperately competing for talent, according to Alan Johnson, a compensation consultant. As such, firms are now often willing to make new employees whole for awards they may be forfeiting — more so than they were pre-pandemic.
Still, given all the different components of compensation and various terms governing if and when it’s doled out, it can be hard for employees to know what their current equity-based compensation is actually worth.
First, while it may sound tedious, it’s imperative that employees review relevant documents, such as stock option plans and employment contracts. These documents contain details on the number of shares included in the awards and the vesting schedules, which is the time period over which grants are given.
They’ll also spell out definitions for terms like termination — leaving a company to retire rather than switching to a new employer can affect the treatment of stock awards that haven’t yet been tapped. They may also specify what happens to awards if a new employer is a competitor.
Employees should check whether they have any stock options that have vested, but haven’t yet been exercised, and see whether it makes sense to do so. If it’s a public company and trading at a price higher than the pre-set price for the employee, then it’s logical to buy, or exercise.
It’s also prudent to be aware of how much time after leaving employees have to exercise options that have vested, and when the clock starts ticking — is it from their date of departure? Or from when they receive severance pay?
There are tax considerations, too. If employees have what are called incentive stock options that have vested, they typically have to exercise them within 90 days of leaving the company. Incentive stock options are taxed at lower capital gains tax rates instead of ordinary income tax rates if they’re held for a certain period of time. If they’re not exercised within 90 days, they’ll lose their favorable tax treatment.
Stock options granted by a private company rather than a publicly traded one are trickier since valuations aren’t as transparent. Startups that issue shares to employees typically have to get assessed periodically in accordance with a provision of the tax code. It’s at least a starting point, so employees should try to get a sense of what those valuations are.
In addition, former employees should remember that private companies may claw back stock options, even after they’ve been exercised, so they can save the biggest gains when the firm goes public for those still at the company. That means the company may force ex-employees to sell shares back, sometimes at the discounted price the former employee paid, preventing them from cashing in on a big payday.
Another wrinkle to keep in mind with private company stock options is that employees have to come up with outside cash to exercise them. With a public company, workers may be able to use a portion of awarded shares to effectively pay for the rest of the shares. That’s generally not an option with a company that’s still private.
For those awarded restricted stock units instead of options, there may just be a time period that has to be met before they’re distributed, or for private companies, there may also have to be a liquidity event, where the firm has an initial public offering.
For certain employees, there may also be awards tied to hitting certain performance metrics. It’s important to understand whether a portion will be paid if someone leaves before they’ve all been met, or canceled completely.
Finally, an employer may be amenable to giving job candidates what they’re forgoing at a former workplace, but it may come in the form of a signing bonus rather than in equity compensation.
For others, the new employer may stick with matching the equity compensation, and then sweeten the deal by including shorter-term grants that vest after say, two years, instead of four. Such a gift may help to attract a top employee, though it may not be enough to keep them there for long. Then the cycle begins again.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
More stories like this are available on bloomberg.com/opinion
©2021 Bloomberg L.P.