Equity Explained – Part 1 – Stock

Many physicians do not have stock, also called “equity”, as part of their clinical salary packages.  When you transition to the pharma/biotech industry, equity is a typical expectation in the overall compensation package.  

I’ll explain this topic as I know it and have experienced it – please note THIS IS NOT FINANCIAL ADVICE! I am not a financial advisor. 

Equity grants you a partial ownership in the company.  The goal is to align your incentives to work for the good of the company given you have partial ownership.  Now, understand that the percent of ownership for an entry level role is likely a very small percent, in the tenth of a percent type digits.  This is still a significant way to potentially build your net worth. 

Because this is initially a complex topic to understand, I’m going to cover EQUITY in several blogs.  Today’s blog is all about STOCK.  Stock, meaning actual stock certificates (electronically these days!).  

Stock – a form of security that indicates the holder has

 proportionate ownership in the issuing corporation

Many times, the offer letter will include a set number of grants that you will receive.  Know that just like there are salary bands for certain titles at a company that the team can work within, these hold for equity grants as well.  Here is an example… using completely FAKE numbers so don’t try to benchmark them to any specific offer you are evaluating, please! 

Jennifer receives her offer letter and in addition to salary and bonus target percentage, the offer includes 20,000 stock units in Biopharma Company.  It is hard to interpret what that 20,000 stock units is really worth without a little more information. 

We need to understand the following:

• how many TOTAL outstanding stock units are there in the company – let’s pretend there are 8,000,000 
• the current price of the stock – let’s say it is currently trading at $10.00/share (or stock)

With this information, Jennifer can now determine:

• the percentage of stock she is being offered:  
  • 20,000/total outstanding stock units 
  • 20,000/8,000,000= 0.0025×100= 0.25%
• the current value of the stock she is being offered: 
  • 20,000 X current company stock price
  • 20,000 X $10.00 = $200,000

So, the thing to know about the CURRENT value of the stock – it is very likely that you are being given complete ownership of the stock immediately.  This gets to the term – VESTING.

The vesting means that schedule by which you start to take ownership of the stock you are being granted.  Every company has a different vesting schedule.  One example would be, 25% of the stock “vest” after you’ve been at the company for one year. After that, the remainder vest on a quarterly schedule for the next 36 months.  Meaning that after 4 years total at the company, you will completely own the 20,000 stock units.  When you own them, you can sell them or hold them – they are yours to decide what to do with.

You are hopefully joining the company with the idea that the company will continue to grow in value, and the stock price/value will continue to increase.  This is not a guarantee, however.  Stocks can go up and down in value.  Thus, I’ve had many people in my career remind me to see the equity grants are potential upside but not to fully rely on their value as part of financial calculations.  I’ve found this to be sage advice throughout my career.  

In upcoming blogs in this series, we will dive further into vesting and also cover stock options – stock options are different than stock… More to come!

Ready to make a career transition to pharma/biotech… want to explore a way to use your medical training and knowledge in a fulfilling way without nights and weekends call or charting. Watch this webinar on Getting Past the Three Major Hurdles to a Career in the Pharma Industry HERE.