Equity compensation is a major part of the total compensation package, but it can be confusing for potential employees. Here’s how recruiters can easily explain it in an offer letter.
The recruiting industry has changed dramatically in recent years, with more companies offering equity incentives to attract top talent. At Origin, we've spoken with recruiters across all industries and were supposed to hear some shy away from highlighting employee equity as part of the compensation package. Why? It’s one of the most confusing parts of the total compensation package, and it’s not always clear how much the equity offered is worth. Being able to articulate the equity component of an offer letter confidently could be the difference between hiring the ideal candidate or settling for a subpar one. This post will explore how HR teams can explain equity compensation to potential employees in a clear, easy-to-understand way.
Why exactly is it challenging for recruiters to explain equity compensation to candidates?
The topic of equity compensation is hard enough to understand without adding complicated jargon and legal concepts. The learning curve gets even higher when you take into account tax implications for employees who may not be as familiar with the ins-and outs surrounding these types deals.
This is a problem because many candidates are afraid to ask questions during the hiring process. The result? They just accept whatever they're given—and miss out on understanding its full value or negotiating for something that feels right, which could lead them down an unhappy path, and result in turnover.
If you’re struggling to communicate the value of your equity compensation to job candidates, here are a few suggestions to help:
Giving employees the vocabulary to talk about their equity compensation is a great first step. First, start with the basics. Explain what equity compensation is:Equity compensation is non-cash pay that gives employees an ownership stake in the company. It can be in various forms, including options, restricted stock, and performance shares. From there, provide a quick overview of the terminology you’re planning to use or—better yet—send them a one-pager that explains everything ahead of your call.Tailor the terminology to your organization’s offerings. For instance, if you work at a private company, defining terms like incentive stock options (ISOs) and non-qualified stock options (NSOs) can be helpful. A public company, on the other hand, is more likely to offer restricted stock units (RSUs). Editor’s note: Download our free eBook An HR leader’s guide to understanding employee equity compensation for a complete list of key terms and definitions.
Explain to the candidate that they must earn their equity by vesting. Vesting refers to the period of time an employee must wait to fully exercise their rights to certain assets. Vesting periods are typically applied to stock options, RSUs, retirement funds, and certain benefits. A common vesting schedule is a 4-year schedule with a 1-year cliff. In this scenario, an employee will vest 25% of their equity on their 1-year anniversary, and the remaining equity will vest on a monthly cadence.
Helping candidates calculate the potential value of their equity can help them better visualize their total rewards package.For public companies, this process is pretty straightforward. The candidate can simply look up what the company’s stock is trading for and use the following formula to determine the value of their equity at that point in time: Equity compensation = (Number of options * (current price - strike price))/vesting period. Unfortunately, it’s challenging to do this exercise with private companies since there’s no public valuation of the stock options. In this case, it can be helpful to have a company-specific equity calculator or even a spreadsheet that allows candidates to visualize the potential value of their stock options. To understand the value of their equity, you have to know the candidate’s percentage of ownership offered. To calculate percentage ownership, take the number of shares offered and divide by the total number of fully diluted shares outstanding.
The number of shares given should be available in the employee’s original offer letter or the equity manager platform the company uses
The number of fully diluted shares can be found by asking someone on the HR or finance team at the company
Once the percentage ownership is calculated (i.e. 0.001%), multiply it by the company’s current valuation to find the value of the options. Keep in mind that the strike price (the set price at which a stock can be bought when exercised), taxes, and other factors may affect the amount.If your employer is looking for a simpler way to calculate this number, Origin’s Equity Manager has a simulator tool that projects the value of equity holdings based on company growth scenarios that employees can manipulate directly.
Once you’ve reviewed these basics with the candidate, give them time to process the information you shared. It may also help to share a summary of what you discussed so they can review everything as needed. Then, after a few days, either follow up or encourage them to reach out with additional questions. Giving candidates the opportunity to explore the ins and outs of their equity compensation increases the chances that they’ll truly understand the value of the offering—making it more likely that they’ll accept your offer over a competitor’s.
It may be helpful to prepare answers to frequently asked questions about equity. Here are a few ideas of what candidates may ask:
What type of equity compensation am I receiving?
How many shares am I receiving?
What is your vesting schedule?
How do I calculate my percentage of ownership?
What happens to my stock options if the company goes public or gets acquired?
How do I exercise my stock options?
How is my equity compensation taxed?
If you’re not sure how to address these questions, we have multiple resources to help you get started:
We know how challenging it is to communicate the value of your equity compensation to candidates. But with the right approach, you can help your potential employees better understand their stock options, negotiate a package that works for them, and decide with all the information in hand. If you’re curious to learn how Origin’s Equity Manager can support the needs of your workforce, request a demo.