Are you in the same position as me? Do you hear about developer stock options, but have no idea what the terminology means? Look no further! In this beginner’s guide to developer stock options, we will take a look at how developer stock options work, and what terms you should know!
Honestly, I have never had developer stock options as part of my total compensation package. I thought this was reserved for American startups, C-level executives, or people that dare to take the leap at a very-very early stage at a startup. But it turns out more and more companies are handing out developer stock options. If you are looking for a new job, read along and you understand developer stock options in your next compensation negotiation.
What are developer stock options?
Developer stock options are a way to get an extra level of compensation on top of your default salary. You get the option to buy a piece of the company in form of stocks. And usually at a cheaper rate than the current market value.
However, developer stock options are never a guarantee. The company might not go public, or the market value of the shares might be much lower than anticipated. As with all financial matters, please do proper research before you make any decisions.
Must know terms
To understand developer stock options, it is a good idea to understand all terminology and abbreviations.
Stock options are the main point of this article here. A stock option gives you the right (but not obligation) to buy a given amount of shares at a set price for a fixed period.
You normally will not be able to buy your developer stock options right away. The period it takes for you to be able to buy your options is called Cliff. Companies usually apply a minimum period you need to be employed before you are able to buy your options. For example, you need to stay at the company for a minimum of 1 year before you are able to buy your shares.
Vesting is in what portions you get your developer stock options. Let’s say you get 100 options over 5 years. You can get 20 a year, 5 a quarter, etc.
Cliff comes to play in vesting as well. If you have a cliff period of 1 year, you will usually get your first year of options after a year, and then follow the vesting schedule.
The strike price is the predefined price at which you can buy the shares.
If you have a strike price of $40 and the market value of your share is $50, you will gain $10 when you sell. Don’t forget to take your local tax laws into account as well.
RSU’s or restricted stock units are an alternative to stock options. Instead of getting the option to buy stocks, you get the actual stocks.
RSU’s usually have 2 forms, either you get a predefined amount of shares, or you get a number of shares based on a predefined amount in value. For example, you can get 100 stocks or $10,000 worth of stocks.
ESOP or employee stock option plan is the legal framework that is used to give options to employees. You can find the terms and conditions of your developer stock option plan in there.
I hope this blog post helped you to understand the basics of developer stock options. We discussed developer stock options, cliff, vesting, strike price, and several more topics. If you want to dive deeper, I recommend Equity 101 for software engineers by Gergely Orosz, and the great book Rewarding talent.
In case you liked this post, I can recommend reading the How important is math in programming post in the developer basics series.