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Accepting stock options in lieu of higher pay is 'Russian Roulette,' says career coach: What you need to know

"The hope is that the company has a sale or goes public and you have a really big payday."

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Congratulations! You've just been offered a job in the field of your dreams at a hot new start-up. There's pingpong in the breakroom, craft beer in the kitchen, and you have the go-ahead and flexibility to implement your creative, out-of-the-box ideas. "There's just one thing," the hiring manager tells you. "We won't be able to meet the salary range that you indicated on your application. But we can offer you equity."

"Great!" you think. "I'll own a chunk of the company's profits, just like one of the investors on 'Shark Tank.'"

Not so fast.

Realistically, what you're being offered are likely stock options, which are very different from what Mark Cuban, Barbara Corcoran, and the others are asking for on the show, says Monster career expert Vicki Salemi. "You're being offered an opportunity to purchase a certain number of shares at a certain price," she says. "And if a company hasn't gone public yet, there's nothing to purchase."

That's not to say that agreeing to a stock option deal can't lead to financial success. After all, the early shareholders at the likes of Facebook and Apple are approximately gazillionaires now. But before you accept any offer that includes stock options in lieu of higher pay, you'd be wise to ask some questions of yourself and your prospective employer, says Angelina Darrisaw, CEO of professional coaching firm C-Suite Coach.

"The hope is that the company has a sale or goes public and you have a really big payday," she says. "It's a little bit of Russian Roulette, so you want to play it smartly."

Here's what you need to know.

The basics of stock options

Not all stock option packages work the same way, but here's a common blueprint: The stock option plan you receive as part of your job offer will give you the right to purchase a certain number of shares in the future at a set price. This price, known as the strike price, will generally be based on the fair market value of the company at the time that you sign your agreement — a number that could be determined by, say, how much money the firm received during its latest fundraising round.

If all goes according to plan, the company will grow, as will the value of each share, and when the firm is sold or goes public, you buy the now much more valuable shares at that cheap early price. That's called exercising your options. You can then turn around and sell those shares at the current market value for a fat profit.

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You typically won't receive access to your options as soon as you're hired, though. Because the company doesn't want you take your piece of the pie and run, your options will typically come with a vesting period — a predetermined period of time in which you won't have access to some or all of your options. And that vesting period usually comes with a "cliff" — a period of time during which, if you leave the company, you get no options at all — of one year.

Under a common model, you might receive 25% of your options after year one. After that, you may receive the remainder of your options on a monthly basis spread over the next three years. "You'd have to stay for four years for all of your shares to vest and to reap the full benefit," says Salemi. "But remember, if the company hasn't gone public, there's nothing for you to buy.

What to do if you receive an equity offer

You're more likely to see an equity offer from an up-and-coming firm that wants to preserve cash flow, says Salemi, adding, "It's important to know that they're often extending you a salary offer that's below market value." 

To decide whether such an offer will work for you, follow these three steps:

1. Negotiate your salary offer first

"You should always negotiate your salary," says Salemi. "They're making this offer because they want to pay you less now and pay you more later. Focus on what you're getting now, and know the amount that you won't accept."

If the company won't budge on the salary, get a good picture of when and how frequently salary increases typically occur, what metrics the company uses to evaluate performance, and how that performance is tied to your pay, says Darrisaw. And just because the company is strapped for cash now doesn't mean that will always be the case, she points out.

"If the company is growing, you should be experiencing growth as well," she says. "See if you can get a written agreement. Your salary should be getting closer and closer to market rate any time the company is fundraising or getting new injections of cash from investors."

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2. Assess the equity offer

Your prospective new employer should provide all the details surrounding your stock option package, including how many shares you're getting, what portion of shares outstanding your slice represents, the strike price of each share, and the vesting and exercising rules for the shares.

With the numbers in hand, you can roughly calculate how much money you stand to make given an increase in the company's value. But whether or not such a stock option deal will actually turn out to be lucrative depends on a couple of other key factors.

One is factor personal: whether you see yourself staying at the company long enough for your shares to vest. "Make sure you love the culture and are interested in the work," says Darrisaw. "Ask yourself, "How committed am I to this company? Will they withstand this amount of time? Am I committed to working here this long?"

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The other key factor concerns the financial success of the company. After all, your enormous cache of stock options will be worth exactly nothing should the firm fail. "In this situation you have to not only know your role, but also the industry, and how well the company is positioned to succeed," says Darrisaw.

In this situation, she says, it's not out of line to ask the company about its future trajectory, including executives' plans to eventually sell the company or take it public. "I'd ask if they have plans to go public, whether they're planning to sell, what their timeline is, and what they are doing to build relationships to make those things happen," she says. "What's their exit strategy? If they're a start-up, that's fundraising. These are answers that they'll know."

If a company is hazy on factors such as the specifics of your package or the plans for the business moving forward? "That would be a major red flag for me," Darrisaw says.

3. Keep negotiating

If the company won't budge on the below-market salary, but you think the stock option package is attractive, you can always ask for more shares, says Salemi. "They might say, 'Well, we are lean right now and unable to increase your salary, but we can increase your shares by 20%,'" she says.

You may also be able to negotiate for forms of compensation beyond cash or stocks, says Brie Reynolds, career development manager at FlexJobs. "Because remote work has been so front and center, many companies are willing to negotiate remote work policies and flexible scheduling," she says. "They may also be willing to pay for professional development, which, if you're building your skills, can be just as good as getting a salary increase or stock compensation."

Other common non-cash perks to ask for include a signing bonus and extra paid time off.

When it comes to assessing a deal with tons of moving parts, it may pay to hire a pro, says Salemi. "Can you take advantage of an expense account? Do they have a 401(k) match? How much does the insurance cost? You should have this all in writing," she says. "For complicated financial matters, sometimes it's best to run it by a trusted financial advisor."

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