How to Weigh Stock Options and Cash Compensation

Negotiating salary is about quantifying risk. Compensation strategies that are aggressive with equity and stock options often teams more upside, but with the upside comes more risk.

Before accepting a job offer, be sure you’re striking the right balance. This framework can help you understand what you’re stepping into and whether you’re getting the best deal for your situation.

Lay out your full financial picture

Start with the basics: what you’re earning today and what’s in your portfolio.

If you’re excited about an opportunity with huge upside in the form of stock options, but it decreases your current salary by 40%, you’ll want to get very critical so that you can understand whether you can manage a lower salary and have a healthy cash-flow that supports your lifestyle and long-term financial plan.

Organize your short- and long-term personal goals

Some factors to consider are whether you’re comfortable delaying retirement if your equity compensation doesn’t work out. If so, risking more equity and upside might be a good option. However, if you have obligations such as student loans, education funding for your children, or a large mortgage, prioritizing the security that you can meet them is an important factor to weigh. In cases like those, higher cash compensation has more value.

You’ll also want to consider how much you want to grind. Are you OK working weekends or do you need to take spring break off and spend time with your family?

It’s important to not get too distracted by big numbers – especially hypothetical number – and make sure that you are assigning value to your time. If obligations are met, your cash-flow is where you need it, and you are enjoying your work and your life, there is real, meaningful value there that can’t necessarily be made up by an IPO.

It’s really a concept of living a richer life. Is your life richer because you’re not working weekends, or is your life richer because you have an extra $500,000 at the end of five years? There is no right answer in general, but there is a right answer for you.

Forget about the immediate numbers for a minute

How much money you’ll make next year or over the next 3-5 years isn’t everything. It’s also important to look at how the job impacts your future prospects. For example, understanding what you need to get out of the job, what it means for your career, and whether you’re excited about it.

I worked with a client at Brighton Jones who took a role as an executive of a private company that was trying to go public. The ultimate financial upside wasn’t huge, certainly not what the original projections suggested, but the credibility they earned as an executive who helped take a company public opened some major doors.

The accomplishment was a huge resume boost, and it showed in the value of the next opportunity. Sometimes a job opportunity has value for your career that can factor alongside the monetary value you take home.

Negotiate a total package

Depending on the type of equity compensation in the offer, you’ll need to consider various tax implications. For example, your cash compensation may be taxed differently than your stock compensation if you have Incentive Stock Options.

When you negotiate a total package, include a combination of cash and equity, and then go a step further. Here’s where other executive benefits like deferred compensation plans, supplemental executive retirement plans, and more factor in.

Don’t lose sight of the “normal” benefits. Some companies offer very generous 401(k) benefits, for example. Say you have two offers: Company A contributes $18,000 more than Company B. That means you’ll need Company B’s offer to be about $25,000 higher pre-tax, per year, just to break even.

Make your call

Cash poor start-ups used stock as a lottery ticket-type mechanism to woo high-paid white-collar workers to their businesses. The practice is now widely adapted by nearly every publicly-traded company, tech or not, according to a recent Financial Times report.

Before your swing for the fences, evaluate your foundation, your existing portfolio, and your long-term goals. Stock options can be attractive, especially for workers in their 30s and 40s who have plenty of earning years left in their career.

At the end of the day, it’s offer specific. If you’re weighing multiple job offers and compensation structures, your Personal CFO can help you make the best decision for your personal tax situation and your big picture.