Salary Slips Broken Down | Expectation vs. Reality Revealed 🤯

Summary

The video explains the nuances of Employee Stock Option Plans (ESOPs), especially in startup and pre-IPO environments. It highlights key aspects such as vesting periods, cliff periods, and the complexities of exercising stock options. Viewers learn about liquidity preferences, capital gains taxes, and the challenges of selling shares in early-stage companies. The video emphasizes prioritizing base salary and real benefits over ESOP promises, with advice to carefully evaluate offers and focus on tangible cash rather than chasing lofty salary figures. The overall message is to approach ESOP-heavy offers with caution and awareness.

Takeaways

• 😀 ESOPs are often a significant part of compensation in startups, but they come with complexities and risks that need to be understood before accepting an offer.
• 💡 Stock options have a vesting period, which means you don't fully own them until you've been with the company for a certain period (typically 4 years).
• ⏳ The cliff period is the minimum amount of time before you can begin to vest your stock options, usually around 1 year.
• 💰 Even after your stock options vest, you still have to exercise them at a predetermined strike price, which means paying to own those shares.
• 📅 The exercise window varies by company and can range from 7 to 10 years while employed, or 90 days after leaving the company.
• 📉 Startups might not offer immediate liquidity, meaning you might not be able to sell your shares even after exercising them due to various funding rounds and liquidity preferences.
• ⚠️ Once you exercise your options, you will have to pay capital gains tax (around 30%), even if you haven't sold the shares for cash yet.
• 🧐 Before accepting an offer with ESOPs, ask about the cliff period, vesting schedule, strike price, and the exercise window to ensure you understand the full offer.
• 🎰 ESOPs should be seen like lottery tickets; they can lead to wealth but may also result in taxes on shares that can't be sold.
• 💵 When evaluating job offers, prioritize base salary and tangible benefits over ESOP promises, especially in early-stage startups.
• 🏆 A healthy ESOP-to-salary ratio should not exceed 60%, ensuring that your compensation is balanced with guaranteed income.

Q & A

What is the primary focus of the video script?

The video script focuses on explaining Employee Stock Option Plans (ESOPs), especially in startup environments, and provides advice on how to evaluate job offers that include stock options.

What does the 'cliff period' in ESOPs refer to?

The cliff period refers to the initial waiting period (often 1 year) before an employee starts vesting their stock options. If the employee leaves the company before this period ends, they do not receive any stock options.

What is the significance of the vesting period in ESOPs?

The vesting period determines how long an employee needs to stay with the company to earn the right to exercise their stock options. It is a key factor in how much of the stock options an employee will be able to claim over time.

How does the strike price work in the context of stock options?

The strike price is the predetermined price at which an employee can buy their company's stock options once they vest. It is set at the time the stock options are granted, and it does not change even if the company’s stock price increases.

What happens if you leave the company before the stock options are vested?

If an employee leaves the company before their stock options are vested, they lose the right to exercise those options. The stock options typically revert to the company.

What is the exercise period for stock options, and how does it vary?

The exercise period is the timeframe within which an employee can exercise their vested stock options. It usually lasts for 7 to 10 years from the grant date, but it may shorten to 90 days after an employee leaves the company.

What challenges might an employee face when trying to sell stock options in a pre-IPO company?

In a pre-IPO company, liquidity can be a challenge as employees might not be able to sell their shares easily. Liquidity preferences could prevent them from selling if other shareholders, like investors, have priority in cashing out their shares.

What are the tax implications of exercising stock options?

When exercising stock options, employees may face capital gains taxes, typically around 30%, on the difference between the strike price and the current market value of the shares, even if they haven’t sold the shares yet.

How should one evaluate a job offer with a heavy emphasis on ESOPs?

When evaluating such an offer, one should inquire about the cliff period, vesting schedule, strike price, exercise window, and how/when shares can be sold. It's important to prioritize base salary and benefits over potential future value from stock options.

What is the advised maximum percentage of ESOPs in total compensation?

The advised maximum percentage of ESOPs in total compensation is 60%. This ensures that an employee is not overly reliant on the potential future value of stock options and instead focuses on tangible cash compensation and benefits.