If we imagine a scenario where a candidate, let’s call her Annabelle, has been on a treacherous job hunt but due to her impeccable CV, has received many offers. She narrows down her options to 2 companies and they both offer similar benefits but differ in relation to the salary and equity package. Company A is offering $50,000 more than Annabelle’s current salary but Company B which is a publicly traded company is only offering $20,000 above her salary but $60,000 in company shares that vest over a 3-year period. She is questioning whether there is more value in choosing the higher base or the lower base with the company shares that could either rise or fall in value. If you are reading this and in a similar situation to Annabelle, this article will help you decide whether to base your decisions on salary or equity.
A Deep Dive into Equity
What is Equity?
By securing equity in your company, you are being given an ownership stake in the business—meaning you can financially benefit from its growth and success. Offering equity to start-up employees is commonly used as a compelling candidate attraction tool for start-ups and emerging businesses. Job seekers know that if they join a high-growth, high-potential company, they could cash in on a hefty payday by controlling an equity stake in the organization.
The reason that companies in the growth stage tend to prefer offering equity is because when financial capital is limited and prioritized towards business development, cash is very limited. This is a difficult situation because higher salaries will attract and allow for the hiring of the best candidates which is vital to speed up growth for the company, but cash does need to be prioritized in developing your product first.
The Different Types of Equity
Equity shares – When an employee first joins a company, they may be presented with a set number of equity shares. Unlike stock options, employees do not have to purchase these shares, as they are provided as a form of non-cash compensation. Rewarding employees with equity shares is a common recruiting tactic that can entice candidates to join forces with a start-up.
Stock options – Companies can provide a formal document to employees that details the number of shares they can receive and the price at which they can acquire the stock. The acquisition price is awarded to workers at a steep discount. This is the most common form of equity for employees.
Restricted stock – A form of equity that is ordinarily offered to executives, workers must complete predefined vesting periods before they can acquire stock. This is purposefully designed so executives don’t start working at a company, acquire their shares of stock, and leave to pursue another opportunity.
Stock purchase plans – For employees that receive stock purchase plans, shares of stock are received after a predetermined vesting period—and employees are not mandated to report them on federal tax returns.
What is a Vesting Period?
A vesting period is known as the time before shares in an employee stock option plan are unconditionally owned by an employee. While there are several kinds of vesting periods—such as graded vesting and cliff vesting—the concept remains the same: employees must work at a company for a certain time (usually three or four years) before their equity vests.
Shares worth $60,000 today could be worth multiples of that by the time you’re ready to sell them if the company does successfully in the long run. The company’s valuation could potentially stay the same or fall, leaving you with less money than if you had taken a job with a greater starting salary. It’s high risk, high reward, much like investing in the stock of any one company. If you determine early on that the job isn’t for you, you should also assess if you can live without the cash worth of the shares for a while—or ever. Even while taking on equity entails some risk, the payoff can be enormous.
Should You Choose Equity Or A Higher Salary?
There are multiple factors which can determine the level of risk you wish to incur.
On the other hand, if you are a seasoned professional with other people financially reliant on you, the chance of not receiving the equity payment may not be enticing or reasonable. Because this circumstance requires a predictable and guaranteed basic wage, choosing equity may not be the best option. However, if the employee is optimistic that the company will succeed and that taking the risk will considerably enhance their future financial prospects, equity may be preferred over income.
Another situation is that you are an industry veteran who is looking to leverage your expertise to support a high-potential business and its long-term goals. If you’re willing to take a bit of a risk and are not complete dependent on your current salary to maintain your current lifestyle, joining an emerging start-up could rejuvenate your professional career.
Factors to consider when making the decision:
- Would you personally invest money into this company over others within the industry?
If you wouldn’t personally invest in the company, don’t opt for equity, and pursue the higher salary.
2. Vesting Schedules
The vesting timeline for options is generally four years with a one-year cliff. This means you won’t be able to own stock in the company if you leave within the first year of employment.
Furthermore, under the common vesting schedule, you will have access to just 25% of the options after the first year, with the remaining shares vesting monthly or quarterly thereafter.
If your equity has a four-year vesting schedule, you won’t be able to buy any shares before the first year, and the remaining shares will take another three years to vest.
Consider it if you plan to relocate, return to school, or don’t anticipate to stay long.
3. How strongly do you believe in the company?
Hopefully, you’re excited about the possibilities of any new firm you’re joining, but deciding between salary and equity is an opportunity to consider how positive you are about the company’s future, as well as its exit chances, which will ultimately decide the value of your equity.
Of course, this isn’t easy, and even specialists who are hired to do this frequently make mistakes. If you’re leaning toward a lower pay but a firm you’re thrilled about, this is a crucial element to consider.
4. Option doesn’t mean owned
Stock options are named options for a reason: they don’t imply ownership in the company, but rather the ability to purchase a certain number of shares.
If you decide to buy the shares later, you’ll have to pay the’strike price,’ which was set when the options were granted. When you sell the shares, this should be much less than the market value. You wouldn’t have bought them in the first place if you didn’t have any cause to.
The ultimate goal is for the company’s stock to gain greatly in value during your stay there.
5. What is the percent ownership?
It’s not the number of shares that counts, but the percent ownership that those shares represent. Ask the hiring manager for each role for the company’s number of shares outstanding and calculate the percent ownership each offer would represent. Compare these numbers, not number of shares, between your offers.
6. Can you survive on the lower salary offer?
Joining a fresh start-up may be exhilarating—not to mention a superb learning experience. Lower pay, on the other hand, is usually accompanied by increased equity stakes. The smaller the company, the less likely it has raised (or made) a large sum of money.
Calculate the minimum pay you’d be willing to accept based on your own expenses. This is especially important in a high-cost tech city like San Francisco, where living expenditures can take up a significant portion of your salary.
Get In Contact
As the FinTech industry continues to grow, so does the need for talent to facilitate this. At Storm2 we have specialized in connecting FinTech talent with disruptive FinTech players such as yourself. We are able to assist in any stage of your growth by connecting you with the right people. Please don’t hesitate to get in touch and we would be more than happy to see how we can help and support you in your journey.