Many companies pay great salaries. ESOs are an added perk.
Giving out ESOs is a great way for a company to attract talented workers. In other words, they give you as an employee a chance to benefit if the company does well. They also helps companies reduce salary loads. So it’s a win-win.
This ESOs/salary tradeoff is more pronounced in early startups. As companies mature, ESOs become part of their overall compensation packages. They motivate you to perform well (for the company’s value to rise) and to stay with the company (by vesting your ESOs).
The more talent a company attracts, the more talent flocks to it.
In the end, not only does the company end up with the best brains, but it also gains a competitive edge over other companies.
How to boost your ESO’s earnings
Let’s say, you’re positive that you got a generous amount of ESOs. How do you know for sure? And how do you earn the most from them?
You’re driving a car. Why drive in the slow lane at 35MPH, when you can drive in the fast lane at 65MPH?
Let us illustrate with Mike’s story.
Mike is a typical new employee at a typical company XYZ that offers ESOs.
Mike has a nice salary and a nice ESO package. His ESOs give him the right to buy 40,000 shares of XYZ’s common stock at the price of $0.25 per share.
Mike’s ESOs have a four-year vesting period with a one-year cliff. It means that after working for XYZ for a year, Mike can exercise 10,000 ESOs (convert them to shares).
What does exercise stock options mean? It means that Mike could pay $2,500 in real money and buy 10,000 company shares. After each additional year, Mike can exercise another 10,000 ESOs and so on, until he runs out.
But unless Mike is planning to leave the company, he’ll probably just wait until the exit. Because then his ESOs will exercise automatically.
NOTE: If the company hasn’t gone public yet (if it’s pre-IPO), Mike paid money with no return. But, this is true only if Mike actually paid for the shares.
If Mike leaves XYZ or if XYZ fires him before he’d worked there for a year, and if he didn’t exercise his options, he’ll get nothing. However, if he paid for his vested options, then he owns the shares. And if the company exits after he leaves, he’ll get a windfall and a return on his investment.
The obvious choice for Mike is to stay at XYZ for four years, for his ESOs to fully vest.
A lot of things can happen in four years. XYZ could become a great success and go public. Its share price might skyrocket from the initial $0.25 per share to $20 per share. A huge gain.
How can Mike make money from it?
After working at XYZ for four years, Mike can exercise all 40,000 of his ESOs. That means he can buy 40,000 shares at $0.25 per share for the total price of $10,000.
Then, IF the company goes public, he can turn around and sell them at $20 per share for the total price of $800,000.
Or he can stay at the company until it exits and gets a windfall that way.
NOTE: It’s common for all shares to automatically vest on an exit like an IPO.
Wow. Mike can potentially make an amazing gain of $790,000.
But what if XYZ doesn’t do so well? What if instead of going public it gets acquired or has to shut down?
GrowthAdvisor can help you understand what would happen, if your company:
goes IPO (public);
stays forever profitable
If you could predict the future of your company, you could make some serious money with your Employee Stock Options (ESOs).
That’s where GrowthAdvisor can help you. We’ve crunched data from 800,000+ companies to do exactly that. And we can help you chart your next career step.
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