from Guide to the Job Hunt on Mar 5, 2023

Is my offer good?

Offer compensation is more complex than you might first think. In many ways, compensation may be structured to your disadvantage, and for startups especially, missteps may actually lead to a net negative in earnings.

This post covers important considerations for your offer and negotiations, as well as examples of compensation gone sideways. We'll cover the basic structure of compensation and cover the basics of equity — a nebulous topic at best and a poorly-played gamble at worst.

How offers are not created equal

In general, compensation takes the following form, with three core components:

1. Salary: This is the cold hard cash you receive each year. It is, in some sense, the only portion of your compensation that is guaranteed to have value¹.
2. Equity: This may come in various forms, but depending on your company, its value may be highly volatile. The majority of this post is dedicated to understanding your equity package.
3. Signing Bonus: Signing bonuses are potentially significant but one-time only.²

There are a variety of other negotiable benefits but the above are the biggest movers, dominating the majority of your income⁸. Often times, offer compensation can be distributed across these categories poorly.

Here is an example offer from Amazon. The total has been adjusted, but the ratios accurately reflect my own offer in spring 2022, which we covered in How to plan your job hunt.

1. Salary: $87,000
2. Equity: $270,000 over a 4-year vesting schedule
3. Signing Bonus: $135,000 in your first year, $100,000 in your second

At first glance, the bonus seems amazing, and the first-year bonus of $135,000 seems attractive. However, Amazon uses an extremely unfavorable vesting schedule. "Vesting schedule" just means at what rate the company disburses shares to you:

1. 5% at the end of your first year
2. 15% at the end of your second year
3. 20% every 6 months after

Notice you only receive 20% of your total equity package after 2 years at the company. This is much worse than almost every other company's vesting schedule, as most companies vest evenly over 4 years; at the 2-year mark, most companies would have vested 50% of your total equity.

Amazon's tactic results in the following compensation per year, ignoring raises and annual bonuses:

1. 235.5k = 87k salary + 13.5k in equity + 135k bonus
2. 227.5k = 87k salary + 40.5k in equity + 100k bonus
3. 195k = 87k salary + 108k in equity
4. 195k = 87k salary + 108k in equity

Notice compensation decreases over time, given the unequal emphasis on signing bonus. Knowing this, Amazon will emphasize first-year compensation and the hefty bonus when cajoling you as a candidate. In fact, the emphasis is on "a compensation that accounts for a rising stock price". This is bogus for two reasons:

1. Irrelevant: Every company could argue their compensation accounts for a rising stock price — or for startups, a rising fair market value (FMV). For publicly-traded companies, theoretical growth does not play a huge role when comparing compensation between companies.³
2. Incorrect: At the time of offer, each Amazon share was $164. As of time of writing, AMZN is now worth only half, down 45% at $90. As we'll explain in the next section, the repercussions of this drop are significant, given tax implications.

For both reasons, believing this argument would have turned out badly. In short, Amazon touted competitive first-year compensation, but the heavy emphasis on signing bonus and back-heavy vesting schedule makes the offer very unfavorable. In short, not all offers are created equal. Your total compensation is not the only factor; how it's distributed among these three categories matters too.

Why equity is a gamble

Equity is a complex topic, so let's start with the simplest case.

Directly issuing shares

Consider a publicly-traded company like Apple or Amazon. In these cases, you are directly issued RSUs or "Restricted Stock Units". In other words, you're immediately receiving shares of the company that you can turn around to sell.

RSUs are a relatively safer bet, as they're usually considered liquid assets; in other words, they're usually easy to convert into cash:

1. You can sell immediately. If you sell RSUs immediately upon receipt, you are taxed on the share's value as income tax. However, you immediately get cash on hand and are no longer subject to the stock market's volatility. This is the "safe" route.
2. You can hold. If you hold, you'll additionally be subject to taxes on the margin between the sell price and the issued price. Note that holding can cause problems: In Tesla's case, you may have been taxed at 40% of the original value. After the stock falls to 30% of the original value, you've actually lost money due to taxes — your compensation is negative 10% of the original stock's value. This is rare for large, publicly-traded companies. In this particular case, you could have held for another few months; as of time of writing, TSLA is back up to 50% of its original value.

In sum, directly-issued shares are lower risk, as you're "simply" playing the stock market just like any other trader. Knowing this, at a large, publicly-traded company, the value of equity is fairly straightforward.

Issuing "the opportunity" to purchase shares

At a startup, you aren't directly issued shares of the company. Instead, you're offered an "option" — a chance to buy a share of the company. However, you need to understand the tax implications of options, as there's a much more sizable risk of having negative compensation. Again, the risk is due to the taxes you pay.

The takeaway for options is three-fold:

1. You're purchasing shares "at a discount".
2. These shares effectively can't be sold.
3. You pay taxes for the value of the discount.

Here is slightly more detail for each of these takeaways:

1. Purchasing shares "at a discount": This is called "exercising options". This means you're actually purchasing a shares of the company. To understand how much you pay: The current value of each option is called the fair market value (FMV). The value of each option, at the time of your offer⁶, is called the strike price. When you exercise an option, you pay the strike price, regardless of the FMV — effectively, you're purchasing options at a "discount".
2. Your shares can't be sold. Your shares are more or less "locked up" on paper, which we call illiquid⁵; this means you can't easily sell these shares for cash. If the company dissolves, your shares are worth nothing and the money you paid is lost⁴. Your shares can only be sold, or be otherwise converted into cash, when the company "exits" — either the company IPOs or the company is acquired.
3. You're taxed on the "discount". When you exercise an option, you're taxed on your "theoretical profit" — in other words, the difference between your purchase price and how much each option is supposedly worth. More formally, you're taxed on the difference between the current FMV and the strike price. Say your strike price is $1. At time of exercise, the FMV is $10. In this case, you're taxed on the $9 gain⁷.

In sum, when you exercise an option for a private company, you're placing a big bet that this company will exit. Without an exit, you lose both the money you paid for your shares and the taxes you paid on theoretical gains. In particular, for a company that never exits, exercising an option results in negative earnings overall.

Knowing this, the value of equity at a startup depends heavily on your faith in the company. If the startup fails, then at best, you never exercised options, and your equity is simply worth zero. As a result, at time of offer, the value of your equity is very much subject to (1) your faith in the company's success and (2) your faith that the company will exit.

How to gamble with equity

In summary, assess the offered equity in the following ways, depending on the state of your company:

1. If the company is publicly-traded, equity is a relatively safe bet. Except in rare cases, you can take this at face value when comparing across companies.
2. If the company is still privately-held, equity is a relatively risky bet. You should weight the value of your equity package by (1) your faith in the company's success and (2) chance of exiting. For now, equity is worth at least zero. However, know that once you begin exercising options at a private-held company, equity has a reasonable chance of being worth negative.

Step 1 — Know your offer.

First, ensure you have the following information for each of your offers. It's not enough to know total compensation (TC) for your offer, as recruiters may compute compensation differently. Use this checklist when gathering information⁹:

• Which level is your offer for? If your level is wrong, you'll be negotiating within a lower compensation band. This is one of the most impactful parts of your offer.
• What is your base salary? This number is fairly straightforward. It's how much cash you'll receive on an annual basis.
• How much is your equity package worth? For a publicly-traded company, ask for the number of RSUs you're being issued. For a privately-held company, ask for the number of options, strike price, and possibly projected FMV. Although, these projections are just estimates. For extra early startups, you may want to know what percentage of the total company your equity package represents.
• When is your equity package approved? Some companies — such as Amazon — convert your equity package value into the number of shares when the offer is made. Other companies — such as Apple — convert your equity package value into the number of shares at the next shareholder meeting, after you start.
• What is the vesting schedule? How often and at what rate does your equity vest? In other words, when and how much equity can you exercise over the years? Most vesting schedules follow an even 4-year schedule, vesting 25% of your equity each year. Most schedules also include a "1-year cliff", which means you receive your first vest at the end of your first year. Note that when a recruiter says your equity package is $100,000, it means $100,000 over the entire vesting schedule.
• What is the target annual bonus?****These numbers can range from 5-20% and are a percentage of your base salary. At the end of each year, your actual bonus percentage may differ, as they're mostly dependent on your performance, as well as the company's overall performance.
• What is the signing bonus, if any? Signing bonuses are not universal and are also a one-time payout. However, if the recruiter or hiring manager throws out a compensation number, it's important to ask if signing bonus makes up a portion of that. If companies A and B offer equal total compensation, but company A's offer includes a hefty signing bonus, the company B is offering you higher earnings over time.
• What is the compensation band? A compensation band is a pre-determined range for salary and equity, for different levels. Recruiters are legally obligated to give you this information, but across all of the companies I received offers from, only Tesla AutoPilot shared theirs. This is useful to understand both a) if your level is correct and b) how much wiggle room there is.

I suggest making a table with all of the information above, for ease of comparison. In particular, include the following:

• Add first-year compensation and your compensation amortized over 4 years.
• Add your level. Each company, confusingly, uses different names for different levels. For ease of comparison, I normalized all levels to start from 1. Note that for newly-graduated undergraduates, the level is usually 1. For newly-graduated graduate students — masters or PhD — the level is usually 2.

Here is an example table, using the numbers from our Amazon example above. This table is an example of the decision process we discussed in How to make big decisions.; it'll be instrumental for your decision process, and for once, it's quite easy to rank each choice, in each category.

Step 2 — Compare your offer.

Once you have this information, answer the following questions, which impact how you interpret the quality of your offer:

• How long do you plan to stay? If you expect to stay at the company for only a short period of time (e.g., 1-2 years), a signing bonus is fairly valuable. For example, you may expect to return to academia, or you may expect to move soon. If you plan to stay at the company for longer (e.g., 4+ years), you should down-weight the importance of a signing bonus, as it is a one-time payout. For this reason, signing bonuses are usually easier to negotiate.
• How strongly do you believe in the company? If you believe in the company strongly, you should value equity over salary. On the other hand, if you do not believe in the company, you should value salary over equity. In general, salary is harder to negotiate - startups are short on it, and large companies have pre-defined new grad salaries.

Now, compare your offers to understand how they stack relative to each other and relative to the general population. The point is to understand if and how much you're being low-balled.

• Compare with your other offers. Compare apples to apples. You can compare salaries and bonuses across all companies. To asses equity, compare between publicly-traded companies. Separately, compare between privately-held companies.
• Compare with other people's offers. Ideally, obtain compensation bands from the recruiter. Otherwise, check levels.fyi for crowd-sourced estimations of your company's compensation bands. For AI-related roles, check aipaygrad.es.

At this point, you should have a good idea of your offer's worth, relative to your preferences.

Step 3 — Negotiate.

Negotiation is a complex topic and beyond the scope of this post. However, negotiation is a necessary part of the process, as we discuss in Why and how to prepare for offer negotiations. Furthermore, armed with the above information, you now have a sense of your expectations, whether or not your offer meets expectations, and how much wiggle room you have in negotiations. For the negotiation itself, see How to discuss a job offer.

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