Spotify provides one of the most unique equity offerings to its employees. Employees are eligible to choose their own “Spotify Incentive Mix” in which they allocate a certain percentage of incentive pay to different forms of compensation.

Spotify’s Incentive Mix allows you to choose to receive Cash, Restricted Stock Units (RSUs), At-the-money NSOs, or Out-of-the-money NSOs. As a Spotify employee, you get to designate the different percentages you’d like to receive of each and then Spotify will adjust your compensation to reflect those preferences.

The purpose of this article is to (1) walk you through some of the details of Spotify’s Incentive Mix Program and (2) provide some pros and cons of why you might want to go with one form of compensation over another.

We’ve also built a calculator to help you visualize potential allocation decisions beforehand, so you can feel confident that you’re choosing the right Spotify Incentive Mix.

Options Available Within Your Spotify Incentive Mix

When joining Spotify, the company designates some portion of your compensation to be allocated to your Incentive Mix. They’ll give you a flat dollar amount and then from there you’ll assign some percentage of that dollar amount to go into up to two of the four options listed below. 

For example, you could have a salary of $180k, plus incentive compensation of $200k that can go towards the options below.

1. Cash

2. Restricted Stock Units (RSUs) 

3. At-the-money Options (ATM ESO) x 4

4. Out-of-the-money Options (OTM ESO) x 8

As far as selecting specific percentages goes, you are limited to increments of 25%. You can choose to go all in with 100% in one type, or you can do 25% - 75%, or you can do 50% - 50%.

The only bummer is that the maximum you can choose is two different types. This prevents you from putting 25% down across all of the options.

Spotify Incentive Mix Vesting Schedule

Each of the four options listed above is subject to a 4-year vesting period. 

Spotify breaks up their vesting schedules into monthly chunks starting after 3 months. Fraction-wise, you can think of it as receiving 1/48 of your Incentive Mix every month.

So using the example we described above, let’s say you chose to do all cash with your $200k Incentive Mix.

This would mean that after three months, you’d get paid 3/48 of your $200k, which would be $12,500. Then every month after that, you’d receive another $4,166.67 until the 4-year time period ended.

How RSUs Work Under the Incentive Mix

We’ve written extensively about RSUs, so you may want to open a couple of tabs to do a quick refresher. As you’re examining the Incentive Mix possibilities, the most pertinent RSU articles are RSU Basics and RSU Taxation.

The RSUs you’ll receive under Spotify’s Incentive Mix are just like any typical RSU. On Spotify’s grant date, they will take whatever portion you’ve elected to go to RSUs, then divide it by Spotify’s stock price on that date.

For example, if you put all $200k into RSUs and if on the grant date Spotify (aka SPOT) was trading at $90 a share, you’d receive 2,222 SPOT RSUs. (We’re going to assume that all decimals are rounded down.)

These 2,222 RSUs would then vest over the next 4 years just as it was in our Cash example. The only difference here is that if SPOT’s stock price goes up between the grant date and your vest date, you will have made some extra money!

• 2,222 SPOT RSUs at $90/each

• 3 months go by and SPOT is trading for $100/share

• 3/48 will vest, so 138.89 RSUs

• Value = $13,888.89

In this example, since the stock price went up, you would have received $1,388 more than if you would have chosen cash!

On the flip side, if SPOT’s stock price drops, you would have made less than you would have with cash, but you would at least receive RSUs that have value. Here’s the same example of the RSU Incentive Mix, just this time the price goes down:

• 2,222 SPOT RSUs at $90/each

• 3 months go by and SPOT is now trading for $80/share

• 3/48 will vest, so 138.89 RSUs

• Value = $11,111.11

In this example, since the stock price went down, you’d be down $1,390 compared to the cash alternative.

A very important note regarding RSUs: Unless you sell your shares after the RSUs vest, you’ll continue to own Spotify stock and there will continue to be both upside and downside potential. You can do whatever you see fit here, but typically we recommend selling enough to at least cover your taxes due at vest.

How ATM ESOs Work Under the Incentive Mix

ATM ESO stands for At The Money Employee Stock Option. Quite the mouthful.

Technically, this form of employee stock option is considered a Non-qualified Stock Option (NSO), so you’ll want to familiarize yourself with this form of equity compensation if you choose to elect either this preference or the Out of The Money preference. 

In other articles, we’ve discussed NSO Basics, NSO Tax Treatment, and even have an NSO Tax Calculator you can use.

Just like with RSUs, on Spotify’s grant date, they’ll take whatever portion you’ve elected to go to ATM ESOs, then divide it by Spotify’s stock price on that date. The only difference is that now they’ll multiply that number by 4!

The reason Spotify does this is because unlike RSUs in which you receive SPOT stock free of charge, for you to receive stock from SPOT ATM ESOs, you will need to purchase them from Spotify before you can receive stock.

For ATM ESOs, the exercise price is whatever SPOT’s stock price was on the date of grant. This is where the term, “At The Money” comes from since the option is literally granted at the current market price.

After grant, you’ll have 4 years before your ATM ESOs are fully vested, but Spotify also requires that you make your decision to exercise before 5 years have passed or your options will expire. This is a very important detail to be aware of and we’ll discuss why in a bit.

Let’s assume you allocate 100% of your Spotify Incentive Mix to ATM ESOs. Let’s see what that looks like:

• 200,000 / 90 = 2,222

• x    4   = 8,888 ATM ESOs

• Exercise Price = $90

• 3 months go by and SPOT is now trading for $100

• 3/48 will vest, so you’ll have 555 ESOs available to exercise

• 555.5 ESOs x $100 = $55,550

• 555.5 ESOs x $90 exercise price = $49,955

• Net Value = $5,555

Yes, you’re reading this right. Even though the stock price of SPOT increased, in this scenario (at least at this point), you’re still worse off than you would have been had you chosen RSUs or Cash.

For ATM ESOs’ value to be equal to the Cash option, Spotify’s stock price needs to increase by 25% from the grant date.

For ATM ESOs’ value to be equal to the RSU option, Spotify’s stock price needs to increase by roughly 33% from the grant date.

If Spotify’s stock price goes above those percentage gains, then gains from the ATM ESOs will compound and will quickly become worth more than the RSUs. Here’s an example:

• Grant/Exercise Price = $90

• One person received 2,222 RSUs

• One person received 8,888 ATM ESOs

  • Assume the person with RSUs never sells along the way

• 4 years pass and SPOT’s stock is trading for $180

• 2,222 x $180 = ~$400,000 RSU Value

• 8,888 x $180 = $1,600,000 

  • Minus 8,888 x $90

• ~$800,000 ATM ESO Value

As you can see, ATM ESO rewards price appreciation pretty dramatically. The difficulty is that no one can predict with certainty that this scenario will ever play out.

The other problem is that although a 100% jump like this is possible, keep in mind that you’ll only have 5 years to exercise your SPOT ATM ESOs. They’ll take 4 years to fully vest and will expire after 5 years if you choose not to or are unable to exercise. 

How OTM ESOs Work Under the Incentive Mix

Out Of The Money ESOs work just like At The Money ESOs, but there are two major differences:

1. You’ll receive twice as many OTM ESOs than ATM ESOs, or 8 times the amount that you’d receive in RSUs.

2. The OTM ESOs will be granted with an exercise price of 150% of whatever the grant date value is.

So if you elected 100% of your $200k, the math would look like this:

• 200,000 / 90 = 2,222.22

• x 8 = 17,777.78 OTM ESOs

• Exercise Price = 1.5 x $90 = $135

In this scenario, you’d receive 17,777.78 OTM ESOs with an exercise price of $135, even though SPOT is actually trading for $90. So for your options to be worth anything, you’d need Spotify’s stock price to go up by more than 50%.

The big advantage of choosing OTM ESOs is that if Spotify’s stock price goes up massively, your gains would be compounded as well.
Let’s compare 100% ATM ESOs to 100% OTM ESOs. Let’s say Spotify was trading at $90 on the date of grant and that after 4 years Spotify is trading for $225.

As you can see, choosing OTM ESOs for your Incentive Mix can lead to some pretty big increases in value. You’d just need Spotify’s stock price to increase dramatically - and see that dramatic increase happen within 5 years.

Evaluating Which Spotify Incentive Mix is Best

We’ve helped multiple Spotify employees navigate the process of choosing their Incentive Mix preferences and it’s safe to say that there’s no right answer. Everyone is unique and so are their preferences, so here are some general thoughts on each option to help you determine the options that are best for you.

Pros of Choosing Cash within Your Incentive Mix

1. You’ll know exactly what to expect and the value won’t go down.

2. You can use the cash however you see fit as it “vests.”

3. Choosing cash requires the least amount of future effort. (Managing RSUs or ESOs can be a headache.)

Cons of Choosing Cash Within Your Incentive Mix

1. No embedded upside. You can invest the cash into whatever you want after it vests, but the value you’ll receive as part of your Incentive Mix will not increase on its own.

2. You might feel less connected to Spotify. The whole purpose of Spotify offering this program is to motivate and incentivize its employees through company stock ownership. If you don’t select a mix that includes future stock, perhaps you’ll be less incentivized. 

Pros of Choosing RSUs Within Your Incentive Mix

1. RSUs provide an upside since you’ll receive a set number of RSUs at the time of grant. If the stock price of Spotify goes up, then you’ll benefit from that appreciation.

2. RSUs will maintain some value even if the price of Spotify drops after you’ve received your grant. This is important because typically the Incentive Dollars are pretty sizable and you may not want to lose that value.

3. RSUs are relatively easy to learn about and are easier to manage than ESOs.

Cons of Choosing RSUs Within Your Incentive Mix

1. The value can go down. This is not ideal, but being tied to Spotify’s share price means that your initial allocation of incentive dollars could decrease in value.

2. Requires additional planning with each batch of RSUs that vest. Do you want to continue holding? Do you want to sell? Are there other investments you could make with the money? You’ll want to make sure that you have a solid plan ahead of each batch that vests.

3. Taxes aren’t terribly difficult, but there’s a high likelihood that you will underwithhold. We discuss this in our RSUs tax article, but unless you make over $1M, most employers will withhold taxes for you at a 22% tax rate and there’s a good chance that you’ll owe more than 22%.

Pros of Choosing ATM ESOs Within Your Incentive Mix

1. ATM ESOs provide a way for you to compound your investment in Spotify should the stock price go up pretty significantly.

2. If Spotify’s stock price goes up 33%+, you’ll outpace dollars placed in Cash or RSUs.

3. You’ll have some value as long as the price stays about the exercise price.

Cons of Choosing ATM ESOs Within Your Incentive Mix

1. Your ATM ESOs are worthless if Spotify’s stock price goes down from the grant date.

2. ATM ESOs require a little more work than RSUs as you’ll need to coordinate both exercising and selling.

3. The 5-year expiration gives you a shorter window to see large gains in Spotify’s stock price.

4. You have no way to predict which direction Spotify’s stock price will go. Even if the stock price has been beaten up, it’s still entirely possible that the stock price will continue to decline.

Pros of Choosing OTM ESOs Within Your Incentive Mix

1. You can essentially strike gold if the stock price of Spotify increases dramatically over a 5-year window.

Cons of Choosing OTM ESOs Within Your Incentive Mix

1. The 50% markup on the exercise price is a significant hurdle. In order for your OTM ESOs to be worth anything at all, you need Spotify’s stock price to go up by 50%+.

2. The 5-year window is an even more significant factor with OTM ESOs than it is with ATM ESOs since you need the price to climb higher.

Spotify Incentive Mix Calculator

To help make the process easier, we’ve built a free calculator to help you visualize potential allocation decisions beforehand, so you can feel confident that you’re choosing the right Spotify Incentive Mix.

Here is the link to the Spotify Incentive Mix Calculator and preview just for fun:

As you can see it’s built in Google Sheets. You’re welcome to download a copy for yourself and tweak it however you see fit.

Our Recommendations for Your Spotify Incentive Mix

Our first recommendation is that you devote some time to learning about RSUs and NSOs. The more you understand about these two equity types, the better you’ll be able to evaluate their potential effects on your personal finances.

Second, we highly recommend running possible scenarios through the calculator we provided (Get creative!). But please remember that no matter what you decide, you’ll probably look back 5-6 years from now with some regret because there’s no possible way to perfectly optimize your decision. Running a number of different scenarios should at least allow you to be more comfortable with the decisions you make.

Lastly, we’re here to be a sounding board should you need us. We’re happy to help talk through any of the material we’ve covered in this article.

Thank you for reading and congrats on landing an awesome job at Spotify!