Employee Share Scheme: Which Option to Take?

When I start work at my new place in August, I’ll have only a week to decide what type of share options I’d like. This is a decision that I’ll have to stick with for 4 years! It’s also a decision that will see me earning huge amounts, or nothing at all. 

I’ve read through the share program and I’ve been left baffled, it’s super complicated. So, in this article I’ll work my way through the documentation, nothing will be omitted, and you guys can help me decide which option to choose.

A Big Chunk of Money

A good chunk of the compensation with my new employer is paid out in a share scheme in the form of dollars. It currently amounts to $126,000 base value over the course of 4 years. This figure may be less or much more depending on the options that I choose, and there are 4 options to choose from, let’s call these: Cash, Option A, Option B, and Option C.

The Options can be mixed up e.g. 25% of each or any other percentage of the base value distributed amongst them, we’re not limited to just picking one.

Let’s dive into each of the options in a little more detail.

Cash Option

This is pretty self explanatory, when picking Cash; each month you’ll get a cash amount added to your salary, although this will be 90% of the total base amount. 

So, 90% of $126k divided by 48 (months in 4 years) gives you the cash amount of $2,362.50 per month.

Option A

This option is what you would find in most share schemes. Each month, 1/48 of your base value will ‘vest’ and you’ll be awarded with a share in the company which you can either sell or keep.

The benefit of Option A is you’ll only pay the share price at the ‘grant’ date (when I joined the company.)

So, with a $2,625 base value figure each month, if the share price of the company was $100 per share when you joined, you’d be awarded 26.25 shares each month, no matter how much the share price has gone up (or down.) This is guaranteed each month, and you can sell or keep the shares.

One thing to bear in mind here, is how horrible the Swedish tax system is. There are no tax incentives to share schemes in Sweden, you’ll have to pay your income tax rate each month on the total amount of shares you received based on current value, not grant value. For me, this is 54.5%, that means that of those 26.25 shares, I’ll only receive around 12. Of course, this same tax is taken if the Cash Option is chosen, so it doesn’t factor into the decision too much, it will just mean the total reward is more than halved.

Option B

This is the first of the riskier options as it will only be ‘exercisable’ (available to sell) if the share price crosses a certain threshold, in this case it needs to go up from the initial share price. If it stays flat or goes down, you will get zilch! 

The way this option and the next option work is you’ll only get the difference between how much the share price has risen in profit, but this will be added to a multiplier. With Option B, this multiplier is 4, and the ‘exercise price’ is the grant value.

So using $100 as an example grant value again, if the share price goes up to $150 in 4 years, you’ll get the base value ($126k) multiplied by 4 ($504k) divided by the grant value ($100), this will give you the number of ‘options’ which you can use to buy shares: 5040.

You’ll be able to use each of these options to purchase a share at $100 and instantly sell it at the market value of $150. So the actual gain will be $50 x 5040: $252,000.

Option B becomes more profitable than Option A only if the stock grows by more than 34% in 4 years, anything less and it becomes considerably worse, all of the way to the grant value where Option B will be worth nothing, but anything more than 34% and it will become exponentially more profitable than Option A.

Option C

This is the riskiest option, like Option B, it can only be exercised after crossing a certain threshold, in this case 50%. If the company stock doesn’t grow by at least half of the value at grant within 5 years, you’ll get nothing.

BUT, if it does grow by that amount (the stock has more than doubled in the last couple of years alone,) you’ll get 8 times the base value in options. The difference here is that you can’t buy the stock at grant value, you have to buy at the exercisable value, which is 150%, so using the $100 grant value, if the stock has risen to $200 in 4 years, you’ll be able to buy the stock at $150 per option. And as the options get multiplied by 8X the base value, you’ll have double the amount of options as Option B: 10,080.

So, using the 100% growth metric, buying 10,080 stocks at $150 and selling for $200, you’ll get $504,000.

Like Option B, this option becomes exponentially more profitable than Option B, but the threshold is 101%, for example, with Option B, 100% stock growth equals the same $504k figure ($100 buy for $200 sell, multiplied by 5040 options) as Option C’s 10,080 x $150 buy and $200 sell. Anything above 101% and you’ll be benefitting from that 8X multiplier, but anything below 100% and you’ll be losing out.

Comparing Stock Options

Let’s compare all of the options together based on all being sold after 4 years depending on growth.

Value after 4 years of growth

0% gain 
Base value: $126,000
Cash Option: $113,400 / (after tax) $51,597 ← Ouch!
Option A: $126,000 / $57,330
Option B: $0
Option C: $0

10% gain 
Base value: $126,000
Cash Option: $113,400 / $51,597
Option A: $138,600 / $63,063
Option B: $50,400 / $22,932
Option C: $0

25% gain 
Base value: $126,000
Cash Option: $113,400 / $51,597
Option A: $157,500 / $71,662
Option B: $126,000 / $57,330
Option C: $0

— 34% growth Option B surpasses Option A —

50% gain 
Base value: $126,000
Cash Option: $113,400 / $51,597
Option A: $189,000 / $85,995
Option B: $252,000 / $114,660
Option C: $0

75% gain 
Base value: $126,000
Cash Option: $113,400 / $51,597
Option A: $220,500 / $100,328
Option B: $378,000 / $171,990
Option C: $252,000 / $114,660

100% gain 
Base value: $126,000
Cash Option: $113,400 / $51,597
Option A: $252,000 / $114,660
Option B: $504,000 / $229,320
Option C: $504,000 / $229,320

— 101% growth Option C surpasses Option B —

125% gain 
Base value: $126,000
Cash Option: $113,400 / $51,597
Option A: $283,500 / $128,993
Option B: $630,000 / $286,650
Option C: $756,000 / $343,980

How to Predict Stock Growth

That’s what this is really about, trying to predict how much I think the stock will go up…

Do I think the stock will go down? Choose cash.

Do I think the stock won’t go higher than 34%? Choose Option A.

34%+ Growth? Option B.

Will the stock more than double? Option C.

But, looking at everything a little more closely, we can analyse how much gain difference there will really be, and if it’s worth the risk of not getting anything (or getting a very low amount.)

With Option C, do I really think the stock will grow 125% in value? I mean it could, but if I really wanted to predict that, why not put all of my personal cash in it? It will be less risky than choosing this option, as we have to remember, if it grows by 50%, which is a fair whack, there will be nothing to gain, where as with option B I could have got $252k.

The difference to gain for the amount of risk added is even less when you add 54.5% tax into the question. Looking at the second, after tax figures, the difference between Option B and Option C at a 125% gain is only $57k. At almost $300k gained after tax, I’m not going to be too mad. So is it worth throwing away $115k after tax at a 50% gain for the possibility of $57k on top of $300k at a 125% gain? Or worse still, gaining the exact same if the stock doubled in value with Option C at the risk of losing a lot more if it didn’t double in value.

And realistically, if the stock rose by 100%, I’d rather sell it right then. I wouldn’t want to be holding on to the rollercoaster thinking “When should I sell my Option C stocks as anything above 100% is gaining 8X the value!” I’d end up holding onto them and run the risk of the market crashing and it being worth nothing again. I’d run the same risk with Option B, but a 34% threshold is a lot smaller than a 101% threshold, I wouldn’t be as panicked.

The POWAH of Spreadsheets!

Whilst everything prior to this has been sitting in my drafts folder, I decided to make a spreadsheet to help me decide on which option to take. I calculated the difference between the 3 Options from a 0% gain to a 400% gain, check it out here.

You can see in the chart below that they’ve been quite smart about how they’ve structured the scheme with appetite to risk. 

You can see the astronomical differences between Option C and Option A if the stock did perform well. But you can also clearly see that it’s about perspective.

If you zoom in on the graph instead of looking at 150%-200% gains (you can’t rely on that, if you could, why invest in a passive index fund!?) You can see that the chart starts to look a lot different.

And when you take a hefty tax bill into account, the risk-reward ratio seems even less worth it.

But, I’ve also got to bear in mind that this could also happen…

If the stock jumped from $100 to $400 in 5 years, the difference between Option C and Option B would be $700k after tax, almost 50% more, with a total of $1.6 million net gain being made.

Looking at Stock Forecasts

The dreams of riches would have normally made me want to choose Option C. There is one problem however; the stock in question has stayed flat for the previous 2 years, but has grown by 100% in the past couple of months.

This is a HUGE bummer. To reach that multi-million dollar payout of 400%, the stock only has to grow by a further 100% from its current high to earn the company’s current employees their payouts. But for me, joining a mere month too late, my prospects of it growing by 400% (800% if I’d joined a month before – which would be an $8 million payout by the way) are extremely low. 

If I’d joined when I got my offer instead of waiting for 3 months, I’d be looking at reaching the threshold for Option C within the first month of the 5 year growth period, almost guaranteeing a multi-million dollar payout. I certainly feel like I’ve missed the boat.

Instead, if I choose Option B, and the stock doubled, I’d be looking at a $500k payout at 100% growth rather than a $3.5 million payout with Option C at 400% growth (if I’d joined a month earlier.) Or worse still, if I join and the stock reverts back to it’s start of the year value and drops by 50%, then doubles again over 5 years, I’d be awarded with absolutely nothing as I would have locked in my grant value at the current high.

This is something I’m massively struggling with! Something that should be an employee benefit is turning out to be a surefire route to disappointment and frustration due to joining at specifically the wrong time, when, even if the stock continued to rise, I’d be working alongside multi-millionaires who had joined directly before me, or worse, I’d be awarded with nothing due to joining during a bubble.

Que Sera Sera

As my wife keeps saying, there is no point in worrying about what could have been. I really wish I could just ignore the past values and future predictions and be happy. I wish I hadn’t done this post; ignorance is bliss; but I have, and I’m going to have to try to not be frustrated or envious, no matter what Option I choose or what the stock does in the future.

I’ll just continue to study, enjoy myself, work on my career and save. Maybe one day I’ll have another chance to win the lottery in a share scheme?


What Option would you choose? How would you get over the fact that the stock had just doubled directly before you were given your grant price?

OddsMonkey

19 thoughts on “Employee Share Scheme: Which Option to Take?

  1. Not knowing the company/ sector it’s difficult to tell whether it’s on an upward trajectory as a company and what the trajectory for that sector is, to make a call on whether the Options are realistic and what the probability is of hitting those growth targets. You’re also dealing with a lot of global economic uncertainty.

    So it comes down to risk appetite — personally, I’d go for 50% cash, 50% Option B. That gives you a good mix of certainty and upside. And, as this is a “bonus”, not your main compensation, I assume you’re not relying on it to live on, and so can place some at risk.

    Options B and C are too remote for me. What happens to these stock options if you leave the company before the 4 year period?

    1. I’m pretty confident of the stock going up at least 34% in a 5 year period, which would make Option B worth it. I don’t need the cash every month, so at least Option A to not take the 10% hit. They vest every month, so if I leave before the 4 year period, I’d just lose what I would have earned each month; there is no cliff, so it can be seen as my monthly salary. Although bear in mind, if I chose something like Option C, and I left in a year or 2, those options may not be worth anything (if they hadn’t grown by 150%) so I would get nothing in that instance.

  2. Great read. What a much more inventive mix of options (pun intended..) than usual.

    I feel your pain on the timing – that’s harsh. I’d be curious if they intend to change the structure given the recent rapid growth. I get the impression it’s in their interests to have employees who believe that an option C approach is worth taking still. May be worth asking?

    One random thought – I haven’t done the math but how does it work out if you take the cash and buy your own option structures?

    1. Hey Michelle,

      I don’t think they would change it. It’s probably more of a case of the former stock rally being unusual. I don’t think they intend option C to pay out more than half of the time, to have it vest within a month is pretty crazy.

  3. Your wife is right, I wouldn’t be thinking about what happened a few months ago, it serves no benefit to what is happening now and what may come in the future; it’ll only serve to produce more anxiety and frustration.

    I think for me it’d depend on how well you’re set with your other investments and accounts…if you’re on track, have a great base already and are getting a good base salary from this place (not including the stock option) I’d go for option C. But looking at those charts and the fact that, as you said, it’s grown 100% recently and has remained pretty flat over the past 2 years, maybe option B is the best of both worlds.

    I hope you manage to figure it out though…it’s a big decision. But looking at the bigger picture, how fun an opportunity to live and work in Sweden…don’t forget that bit while getting bogged down in the financials 🙂

    1. I’m leaning more to Option B as well. It just sucks that the payout difference is so vast. I’ll basically be working alongside millionaires! I might go with 75% Option B and 25% Option C.

      Yeah, I need to try to not forget and stop throwing my dummies out of the pram 😀

      1. Don’t get greedy – when folks only see the ‘best case’ is when they bet the farm, dog, cow and kids on the outcome just before the wheels come off and value disappears.

        You don’t have anything until you cash out. Option A (if I read correctly) could let you immediately sell at a gain, hold shares at your choices to sell later, sell immediately and capture a taxable loss.

        Do you have to sell all at once?

        1. I’m trying 🙁 It’s difficult when a carrot is dangled in your face.

          The other options can be cashed out earlier too, they just need to meet the criteria (and they grow exponentially based on stock growth, so it’s probably best to hold off for a number of years.)

  4. Wow, so complicated but a nice problem to have! 🙂

    I would repeat what your missus has said, there’s no point in worrying about what could have been. At my last company, I was made permanent the month after they got rid of non-contributory pensions so missed out…

    It might be difficult for you but best to try to focus on the wins, not the losses – you were annoyed recently that Tesla shares had gone up after you had sold them, almost forgetting that you still made a decent overall profit!

    If I were in your shoes, given that you are able to mix the options, I’d probably go for something like 50% A, 30% B and 20% C. Option C seems to be a real gamble but you’d be kicking yourself if you didn’t have a bit in there, more so I think than if you did and you gained nothing.

    It’ll be interesting to see what you go for eventually and I hope you’d be able to let us know how it all turns out.

    1. It’s haaaarddd Weenie :'( But yeah, I know I have to try and not focus on losses, I need to always be grateful that I was so lucky to get to where I am, and if I do get $500k, I should be really grateful for that and not annoyed that it isn’t $3m!

  5. So based on what you said about their stock price I know exactly who you’re going to work for. I’d suggest reading Stratechary’s articles on their current strategy and opportunities. They’re currently going hard after a popular, relatively under-commodified market, where they want to be an aggregator. If they win that market it will probably be worth more than their current market and the other major tech player in the space isn’t particularly interested in owning the whole market (it’s not in their DNA).

    Based on what I know I’d be strongly tempted to take a chunk of option B. Given the recent spike option C is perhaps a bit optimistic. The difference only becomes huge after another 200% growth and I’m skeptical they’ll get there super fast.

    The other thing to note is golden handcuffs. I stayed at a tech company a while longer than I should have, partially cause I liked the culture and people, but also because of milestone bonuses. I left last year still super worried about losing out, but it’s been great for my learning and then the company got hit by covid so I would never have gotten the bonus anyway plus would have lost 90+% of the stock value I had (not a ton but 4 figures). So yeah, beware golden handcuffs.

    1. Thanks Cam, I’ll give that article a read.

      I came to the same conclusion regarding Option B. If there wasn’t the recent climb, I definitely would have gone all-in with Option C, just really frustrated and that could have been FIRE achieved and then some!

      Yeah, I have to be careful of the Golden Handcuffs. I do hope that my FIRE stash is enough to let me break free easier. I will also be continuing to study for future FAANG positions, so I’d hopefully beable to take off the handcuffs to be strung up in another pair!

  6. People usually say you feel your losses more than your wins, so I think I would go for something along the lines of 50-60% option A, 50-40% option B and maybe 10% option C. If C pays off, sure you’ll be filthy rich, but if it doesn’t you’ll have nothing.

    1. Hey Dr, that’s very good reasoning. BUT, I’m almost certain that the stock will rise by more than 34% in the next 5 years, and I’m pretty confident I will stay for at least that long. So, I’d say there’s no point in going with anything less than Option B. If I had already stayed for 5 years and knew I probably wouldn’t stay for another whole term, I’d be going fully with Option A I think.

  7. I’m pretty sure I know who you’re going to and a recent deal drove a big chunk of the increase in stock price. Given they’re all on growth and were still making a loss locking in for 4 years is probably pretty risky in my book – waiting for Q2 results is to late for you but if COVID lockdown has helped them then there could be a decent jump in stock price – You could view all of the above as the musings of a madman!

    If it were me I’d go:

    Option A: 25% – Hold the shares as a buffer if you leave early
    Option B: 65% – I can see 35% plus growth from where they are today
    Option C: 10% – Gotta be in it to win it

    If I thought I wasn’t going to stick 4 years with them I’d just go 100% option B

    I get various stock options and it can be confusing, until a month ago I didn’t really include it in my Net Worth as in my mind it wasn’t real! The non tax-efficient ones I just sell around vesting day and don’t think about the what if – my company’s stock is not going to double/triple so I don’t get bent out of shape.

    1. Thanks for this Dave. I’m pretty confident I will be there in 4 years’ time as I’ll be studying for a graduate degree whilst in Sweden. I’m leaning more towards 25% Option C and 75% Option B, as I can choose when to use the Options, I could leave Option C to grow and sell Option B if it crossed 100% or so.

      Yeah, I know the reason for the huge recent growth; I just wish they’d waited a little longer to announce it 😛

  8. One thing I would add to your graph, a horizontal line of your ‘enough’ money.

    Remember, if you are persuing FI you don’t simply want to make as much money as possible. You want enough to not have to work again. So plot the target and consider what options get you close to that target in as many senarios as possible.

    One thing I note on your graphs, you assume that the share price will only go up. I would always assume it could go down and have a look at what the effect is. Even if you are in a high growth company, something could go wrong and the market will have already factored your expected growth into the price. Remember your main source of income is tied up in the company, you may want some insurance.

    Personally, I would have a blend of Mostly A & B, though possibly have a small abount in C as ‘fun money’. Maybe A: 45%, B: 45%, C: 10%.

  9. Two thoughts about stock-related pay: 1) your salary is already tied to your employer. How much more do you want tied to that source of income? 2) the gains are based on the movement of the stock. How much influence do you have on the stock?
    I see this kind of compensation plan a lot b/c I’m a career coach, and many of my executive clients have a large portion of their pay tied to company performance in some way (could be performance bonus and not stock specifically). We always look at the above 2 questions more than just what the hypothetical returns might be.

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