What stock actually is, and how employees get it

If you get a job offer that includes equity, the company is offering you a piece of ownership. Sometimes that's worth a lot and often it's worth nothing, and the difference is in details that the offer letter tends to skip.

The forms it takes

There are three common ways an employee gets stock in a conventional company.

Stock options give you the right to buy shares later at a fixed price, called the strike price. If the company's shares are worth more than the strike when you exercise, you make the difference. If they're worth less, the options are worthless and you don't exercise. Startups mostly use options because they don't cost the company cash.

Restricted stock units, or RSUs, are a promise to hand you actual shares on a schedule, with no purchase needed. When they vest, you own the shares and owe income tax on their value that day. Public companies mostly use RSUs; Amazon, Google and Microsoft pay a large share of total compensation this way.

An employee stock purchase plan lets you buy company stock out of your paycheck at a discount, usually 10 to 15 percent. It's a benefit, not a grant, and it only exists at public companies.

Vesting

You don't get the equity when you sign, you get it over time. The standard schedule in tech is four years with a one-year cliff: nothing for the first twelve months, then 25 percent all at once, then the rest monthly or quarterly. Leave in month eleven and you get nothing.

Whatever hasn't vested when you leave, you forfeit. Companies use this on purpose, and it's the main reason equity is called "golden handcuffs."

The part that catches people

If you have options and you leave, most companies give you 90 days to exercise them or lose them. Exercising means paying the strike price, in cash, for shares you can't sell because the company is private. If you were granted 20,000 options at $2, that's $40,000 out of pocket, plus a possible tax bill, for stock you'll be holding indefinitely. A lot of people walk away from options they earned because they can't afford to buy them.

Some companies have extended that window to five or ten years, so ask.

Private company stock is also illiquid. There is no market for it. You can't sell it unless the company goes public, gets acquired or arranges a buyback, and it may do none of those. Plenty of startups that hand out equity never reach an exit, and the equity ends at zero.

Dilution and preference

Your percentage shrinks every time the company raises money and issues new shares. A 0.5 percent grant at a seed-stage startup might be 0.15 percent by the time it's acquired. Ask for your grant as a number of shares and the total shares outstanding. A percentage alone hides dilution, so ask again after each round.

Investors also usually hold preferred stock, which gets paid first when the company sells. If a company that raised $80 million sells for $80 million, investors can take all of it and common stock, which is what employees hold, gets nothing. This happens more than you'd think.

What to ask

• How many shares, and how many are outstanding in total?
• What is the strike price, and what was the last price investors paid?
• What's the vesting schedule and is there a cliff?
• What happens to unvested equity if the company is acquired?
• How long do I have to exercise after leaving?

A company that gives clear answers is telling you something, and so is one that doesn't.

How employee ownership differs

An employee stock ownership plan, or ESOP, works differently. The company puts shares into a trust on employees' behalf. You don't buy anything and you don't pick a strike price. You accumulate shares by working there, and the company buys them back when you leave or retire. It's closer to a pension than a stock grant. Our explainer on employee ownership covers it.

The other difference is what you own. RSUs at Microsoft make you one of millions of shareholders with no practical influence. Shares at a worker cooperative come with a vote.