How to Negotiate Stock Options With Your Employer

There are many reasons why you might want to negotiate your stock options with your employer. Maybe you're not comfortable with the risks associated with stock options. Maybe you think the options are not a good fit for your investment portfolio. Maybe you're simply not comfortable with the idea of owning stock in your employer's business.

Maybe you're unsure of what a stock option is and whether or not you should take advantage of the offer. If any of those rings true for you, read on to discover what stock options are and how to negotiate your stock options with your employer. 

What is a Stock Option?

If you're in the medical or pharmaceutical field, chances are good that your employer offers some kind of stock option plan. In fact, according to BioSpace's 2022 Salary Report, 40% of surveyed life science professionals receive stock options as part of their compensation. This figure has increased by 8% compared to last year.

While these plans can be a great way to save for retirement or other long-term financial goals, they may not be right for everyone.

When an employer offers employees a stock option, they give the employee the right to purchase a certain number of shares of stock at a set price. The employee can then choose whether or not to purchase the stock. If the stock goes up in value, the employee can make money. If the stock goes down in value, the employee can lose money.

Employees who choose to purchase stock options typically do so because they believe the stock will go up in value. This can be a risky investment, but it can also result in a large payoff if the stock goes up as expected.

For instance, if you're working for a start-up that is quickly gaining popularity, you may believe the company's stock will go up in value. In this case, you may decide to purchase a stock option. If the company's stock does indeed increase in value, you can turn a pretty profit.

Understand Vesting

Typically, when an employer offers a stock option, the option is not immediately available to the employee. The employee must wait for the option to "vest." This means that the employee must stay with the company for a set period of time before they can exercise their option and purchase stock.

The vesting schedule is typically set up so the employee has the ability to purchase more shares as they stay with the company longer. This is meant to incentivize employees to work at the company for the long haul.

The downside to vesting is that if you leave the company before your options have vested, you'll forfeit the opportunity to purchase the stock.

For example, let's say your options vest over four years with 25% of the total options vesting each year. If you leave the company after two years, you'll only have 50% of the total options available to you. If you leave after three years, you'll have 75% of the total options available to you. And if you stay with the company for all four years, you'll have 100% of the options available to you.

As an employee, it's important to be aware of the vesting schedule for your stock options so you can make an informed decision about when to exercise your options. Be sure to ask your employer about the vesting schedule for your options when you're first granted them.

Why You Should Negotiate Stock Options

There are a few reasons why you might want to negotiate your stock options with your employer.

One reason is that you may not be comfortable with the risks associated with stock options. If the stock goes down in value, you could lose money. No one wants to lose money, but some people are more risk-averse than others. If you're the type of person who doesn't like to take risks, stock options might not be right for you.

Another reason you may want to negotiate your stock options is that you might benefit more from another perk. If this is the case, speak with your coworkers to find out how they feel about what your employer has to offer. If others are also unsatisfied with the offerings, you may be able to make a stronger case with your boss. 

Finally, you might not believe your employer's stock options offer is fair. If you think the offer is too low, you might want to try to negotiate for a better deal.

How to Negotiate Stock Options With Your Employer

If you're interested in negotiating your stock options with your employer, there are a few things you should keep in mind.

First, be sure to do your research. You'll need to have a good understanding of both the stock option plan and the company's financial situation before you can make a case for why you deserve more favorable terms.

Start off by making sure the size and structure of your options are in line with industry norms. If they're not, you may have some room to negotiate. Be sure to check your employer's offer against those of similar companies in your industry.

You'll also want to look at the company's stock price history and recent performance to get a sense of how much your options could be worth in the future.

Additionally, you can also see if your boss will allow you to see what is called a, "fully diluted" view of the company. This will show you how many shares have been authorized by the board and will give you a better idea of what your options could be worth if the company is ever sold or goes public.

Keep in mind that if you leave your company, you may not be able to take your options with you. So, if you're planning on leaving in the near future, it may not be worth trying to negotiate for more favorable terms.

Finally, remember that it never hurts to ask. If you think you deserve more favorable terms on your stock options, be sure to bring it up with your employer. They may be open to negotiating a better deal for you.

If you're not comfortable with the risks associated with stock options, or if you think the offer is unfair, don't be afraid to try to negotiate for a better deal. Be sure to do your research and ask your employer about the vesting schedule for your options so that you can make an informed decision about when to exercise them.

When it comes to stock options, there's no one-size-fits-all solution. What's important is that you understand your options and make the decision that's best for you.