How to Negotiate for Equity in a Startup or Private Company

A woman researching strategies to negotiate for equity in her startup.

Equity can make you rich. But that’s a bold claim for most workplaces. If you’re lucky enough to work for a future unicorn then, yes, getting a share of ownership really can set you up for life by age 40. That, however, is rare. Nevertheless, stock options and other forms of equity can be an important part of your compensation package. Particularly if your company does well, this can be an excellent way to build long-term savings early on. Here are a few ways to negotiate for equity with a private company.

A financial advisor can help you understand your stock options and what choices you have financially when it’s time to exercise them.

Research Your Company

First, make sure that your company offers equity in the first place. Most private companies are what’s called a “closely held” corporation. This means that the ownership is entirely held by a small number of individuals, sometimes even just one person. In those cases it’s rare for the company to share equity outside of c-suite offers. Doing so would not only be against corporate practice, but it would affect the legal status of the firm and potentially force them to change their operations.

So as you apply for each job, research the corporate structure. If you want private stock as part of your compensation, make sure that company can and will make this kind of offer in the first place.

Negotiate During a Transition Period

If you are applying for a new job, this is inherent. But let’s say that you currently work for a company and would like to add equity to a part of your compensation package. What now? The answer is, probably, wait.

Adding equity to your existing compensation package will materially change the nature of your relationship with the company. That means you may want to wait for a natural transition point to bring this up. Ideally, raise this issue at your next promotion, asking for it as part of your updated compensation for the new position.

If that’s not realistic, then bring this up at your next significant review. In this case, don’t expect to simply bolt stock options onto your existing pay package. Instead, during your review, raise this as one of your goals and discuss what it would take to get there.

Offer to Trade Pay for Equity

This is sometimes known as the “sliding scale” approach, and it’s very popular with new or startup companies. Basically, during your salary negotiations, you ask for an equity stake in the company. Then, be prepared to accept a lower salary in exchange for that equity during your negotiation. Basically you have a sliding scale of salary that you’re willing to accept, higher pay without equity but lower pay in exchange for shares.

This can open room for negotiation because you have something of value that you can trade for the shares. Startup companies could embrace this as it lets them save on money on salaries in exchange for a potentially high-value payout if the company succeeds.

Ask for Vested Options and RSUs, Not Direct Shares

An employee asking his boss about adding equity to his existing compensation package.

There are several ways to receive equity from your employer, but the two most common are called stock options and restricted share units (RSUs).

With a stock option, you get the right to buy company stock for a fixed price based on certain terms and conditions. With RSUs, your employer will give you shares directly, again based on certain terms and conditions.

In both cases, the most common condition is what’s called a “vesting schedule.” This means that you don’t get your shares until you have worked at the company for a minimum amount of time. For example, say you have stock options that vest in three years. This means that your employer will sell you shares for a fixed price, but not until you’ve worked there for three years.

By contrast, direct shares mean that you ask to receive shares of stock directly as part of your compensation. (This is similar to restricted stock units, just without the restrictions.)

As you negotiate, typically start by asking for direct shares. If you hit a sticking point, though, change your ask to options or RSUs. This will allow your employer to get something of value in exchange, the vesting schedule, which can help move your negotiation forward.

Know Your Legal Rights and Responsibilities

Holding equity in a private company is different, and significantly more complicated, than holding shares of common stock in a public firm.

With a publicly traded company, the price of each share is public information available at a glance. You can trade these shares freely with anyone, and it’s easier to understand the tax consequences.

But, none of that applies to private shares. As just one issue of many, individuals cannot freely buy and sell shares of private stock. Trading is restricted to accredited investors. So you need to understand who, exactly, will buy this stock from you when the time comes to cash it in: Will it be your employer? Capital investors? Are they planning an IPO?

To figure all this out, speak with a professional. Once you have an offer, talk to either a financial advisor or a lawyer who can help you understand exactly what you will get under this contract. It will be worth the consultation fee.

Determine the Company’s Value

Make sure to review the long-term requirements that any equity comes with: What happens with the shares if you leave the company? Is this package performance based and, if so, what concrete metrics does your agreement set? If you needed to trade pay or bonuses to get this equity offer, are you confident that the exchange was worth it?

All of this will inform the overall value of your equity offer. Think about this carefully. Stock can be a valuable part of any compensation package, but that value is based entirely on the strength of the underlying company.

Bottom Line

An employee asking about existing stock options and other forms of equity in her compensation package.

Salary negotiations can be one of the most fraught parts of getting any new job, and that’s particularly true if you’d like to add stock options to your compensation package. Here are some tips for how to start that conversation if you’d like to get equity from your private employer.

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