How to evaluate a SWE offer
You just got a full time offer to a tech company! Yay! Read this post to learn about the main components of your offer and how to evaluate them!
Disclaimer: I am not a CPA or CFP. Any recommendations included in this article are my own. I hope that this post serves as a primer to you and empowers you to be able to dive deeper into any financial planning topics you'd like with your folks or with a Certified Financial Planner.
So you just got a full time offer to a swanky tech company and you're confused on what all these numbers mean (or how to compare them to other offers you may have gotten). First of all, take a moment to congratulate yourself! This is an awesome achievement!
As for evaluating the offer itself, not to worry, I will break down the basics for you.
Most SWE offers are comprised of these components:
Sign on bonus
RSU grant (could be options too, or instead of; separate section on that below)
Note: In this post, I refer to taxable events and income taxes vs. capital gains taxes. I describe how taxes work in a different post in order to focus more on evaluating an offer in this post.
Your base salary is exactly what it sounds like. It's how much gross money (not net money, because taxes will be taken out) you will make in a year. This is one lever for negotiation, but it doesn't usually get updated for a new grad offer unless you also have a Masters (but in that case, the starting base salary would likely be higher than the standard new grad SWE offer anyway). If you're not a new grad, base salary is definitely something that a recruiter can meet you in the middle on and you should negotiate.
Sign On Bonus
The sign on bonus is a one-time bonus that is paid out to you some short time after you join the company (normally within the first 3 months). Unlike the base salary, the sign on bonus does have some room for negotiation, especially if you have competing offers.
You don't get this immediately when you join and it is subject to what's called "clawback". Clawback refers to a process in which the company can take back some portion of that sign on bonus if you leave the company within a year. If you stay for at least a year, the entire sign on bonus is yours, so that's good.
The sign on bonus will be taxed quite heavily when you get it. So don't go crazy and immediately treat your friends to a VIP bottle service night at a club 🤣. Do not be surprised if you only get 40-50% of the value of your sign on bonus deposited into your account. When you file your taxes, assuming you were primarily being paid by your salary and maybe annual bonus, you will likely get back a portion of the sign on bonus as part of your federal and state income tax refunds.
The RSU grant is one of the most important aspects of any SWE offer. RSU stands for "Restricted Stock Unit". Basically, the company is saying "we will give you some number of stock units over some period of time". This is considered a part of your income, even though it's not cash.
The three components of the RSU grant are:
Number of shares
Vesting cliff and schedule
Total number of years for grant
Some may argue that the second and third are the same because they are both related to time, but I like to separate them to analyze them independently.
Let's go through an example for RSUs:
Say a company gave you a 4-year RSU grant of 4000 shares, with a 1 year vesting cliff in which a quarter of them will vest, and then equal vesting of the remaining shares over each subsequent quarter until end of the grant. What that means is that over 4 years, you will receive 4000 shares, but you will have to wait for 1 year before you get the first 1/4 of the shares (1000 shares). And because you weren't getting shares prior to that point, this first 1/4 of the shares will vest in a lump sum. After that point, you have 3/4 of the shares remaining (3000 shares). There are 3 years left in the grant, and since you have equal vesting over every remaining quarter until the end of the 3 years, you will vest 250 shares per quarter (250 shares/quarter * 4 quarters/year * 3 years = the 3000 remaining shares).
Every time that you have shares vest, that is considered income, so the government treats that as a taxable event. Because you made income (even though it wasn't cash because you got shares instead), your company will normally do a process called "sell-to-cover" where they will automatically sell a portion of the shares that are vesting to cover the taxes that are owed. However, I've heard from many of my peers, and seen from my own experience, that the company can sometimes undersell, so you may still owe taxes come tax season the next year.
The vesting schedule would look like this (say you start in the beginning of 2021):
Whenever shares vest, they are deposited into what's called a brokerage account and you own those shares. There are many different brokerages, such as Fidelity, Schwab, E-Trade, etc., and companies choose 1 or provide a selection of choices for new employees to pick from. Because you own the shares once they vest, you have two choices:
Hold the shares (maybe because you don't need the extra cash now and you would like to wait to see the share price go up)
Sell some or all of the shares that vest (because you would like some extra cash)
Note that if you pick option 2, there are different taxes called capital gains taxes, which you will then owe come tax season the next year.
401k provider and possible matching
While this may not be a main focus of the offer, it's still something you ask the company about if they haven't already included it in the offer letter because it's a very important benefit. In addition to your base salary, sign on bonus, and RSU grant, most tech companies offer 401(k) retirement plans. The way this works is that they either pick 1 or offer a selection of brokerages which can service 401(k) plans, such as Fidelity or Vanguard and then you get to choose which retirement product you'd like from the brokerage (traditional or Roth 401(k)). Normally within the first couple of weeks after joining, you'll setup your 401(k) plan (and maybe do a rollover from your prior company's 401(k) plan to your new plan), and select what percentage of your paycheck to deposit into the 401(k) plan as well as what asset allocation (bonds, stocks, target date funds, etc.).
Company matches for 401(k) plans are not in every tech company. Generally only the most mature tech companies do this, rather than startups. The basic idea is that the company will actually deposit more money into your 401(k) plan beyond what you add as part of your standard paycheck allocation. As of the writing of this post, an individual not near retirement age can put up to $19,500 into his/her 401(k) per year from paycheck allocations. But, a company match of say, 50%, means that you will get an extra $9750 deposited into that account for free, courtesy of your company. What an awesome benefit! If your company does offer 401(k) matching, then you should try to max out your 401(k) contributions to maximize the match.
If this is a bit overwhelming, not to worry: I have a separate post on retirement account types.
Medical, Dental, Vision Plans
Like 401(k) plans, medical, dental, and vision plans are not in the spotlight for most SWE offers, but they are another class of benefit that you should consider when a company makes you an offer. If the company has very limited medical plans (like only an HMO), or the monthly fees are quite high, that may make it less attractive to work at that company.
Note that mature tech companies tend to offer a wide variety of medical, dental, and vision plans, so this isn't really much of a concern, but smaller companies may have much more restricted options.
Even more aspects of SWE offers
There are a few other things to consider that can be part of some SWE offers:
Annual Bonus is sometimes attached to offers from more mature tech companies. The idea is that in addition to your salary, you will make a bonus that is some percentage of your salary and will be paid out to you in the end of the year or in the beginning of the next year. An example of this would be the following: Your offer states that your base annual bonus is 15% of your salary. What that means is that you will get a bonus in the end of the year or in the beginning of the next year as a lump sum and that the bonus will be at least 15%, subject to increases due to awesome performance (which I'm sure you're gonna do because you're clearly smart if you're reading this blog 😃).
RSU refreshes are a way for a company to incentivize you to stay in the company in the future. Remember that 4-year RSU grant I mentioned earlier? The example I provided assumed that you were only ever granted 1 package of shares that vested in entirety over 4 years. But, what many companies do nowadays is they actually give you a new 4 year grant at an annual frequency. What that means is that after your first year, you could get another nice package of shares promised to you, but they would likely have the same vesting schedule as the first grant (meaning you have to wait 1 year to have the first 1/4 of that grant's shares vest).
Note also that refreshes tend to not be as large as your initial grant. Initial grants are designed to get you to sign the offer, but refreshes are designed to keep you in the company. They are normally around 1/4 of your initial grant's number of shares, but if the company keeps giving annual refreshes, more and more vests will compound over time. That incentivizes you to stay at the company.
Let's update the prior RSU example by imagining that you get another 4-year grant after the first year, which is a quarter the size of the first grant (so in total, 1000 shares over 4 years). To keep the example simple, let's say you join your new company at the beginning of 2021:
ESPP stands for "Employee Stock Purchase Plan". The basic idea behind it is that employees who join this program can buy more stock of their company, but at a discounted price. Normally, ESPP windows are 6 months long. During that period of time, you tell the company how much of your paycheck you want to set aside as reserves to buy the company stock once the ESPP offering occurs. After the 6 months, the company looks at the stock price at beginning of the window and the end of the window, picks the smaller of the two, and then offers stock at a discount (normally 15%) to employees who joined the ESPP offering. So it's like getting 15% extra money as soon as you get the stock. And because this is stock that you paid for, rather than being granted (as is the case with RSUs), you are not taxed when you get the shares (you're taxed only when you sell).
Concise summary for those of you who are mathematically minded:
Purchase Price Per Share = 0.85 * MIN(price at beginning, price after 6 months)
Options are an entirely different form of non-cash compensation and are normally used in smaller companies and startups, rather than in larger companies, as an alternative to providing RSUs. There are also two different umbrella types of options a company could offer you, but before we get into the types, let's briefly go over what an option is and show the contrast between its definition in the stock market and its definition in the context of a SWE offer.
Options as you would see in the stock market are essentially contracts to buy or sell some number of shares of a company at a certain price point, called the strike price, and by a specific deadline. There are two types of option contracts in the stock market, called calls and puts. If you own 1 call contract, you have the right to buy 100 shares (each contract is normally for 100 shares at a time) of a particular stock at the strike price of the contract, by the expiration date of the contract. If you own 1 put contract, it's just like the call contract, but it's meant for selling 100 shares, not buying 100 shares. So options can be used for speculative purposes or even for discretionary income, but that is not pertinent to this post.
Options that are granted to you by a company are different from options in the stock market. The first type of option is called a cash-settled option. The second type of option is called an equity settled option. They differ in that cash-settled options when they are exercised directly result in cash, but provide no ownership stake, meaning you aren't granted any shares. Equity settled options are exercised into shares, which you can then hold or sell, but the point is you have shares after exercising equity settled options, but you have cash after exercising cash-settled options.
The taxation rules for each type of option are different because one yields cash and the other yields shares of your company.
Options are harder to value than RSUs because you can't just look up their value. Their value is derived by the delta between the strike price in your option grant and the strike price when you choose to exercise the options.