Long Story Short
- In today’s candidate-driven labor market, job seekers have an important choice to make: do they prioritize a traditional annual salary, or do they take a chance on securing equity in a startup company?
- For emerging businesses, startup equity is much more prevalent in conversations around compensation—and is often viewed as a means of attracting talent.
- Although there is risk involved in taking on equity, the reward can be monstrous.
- Here’s what you need to know about accepting equity as a form of compensation.
What is equity?
In the startup world, equity is a term that is often discussed—but seldom understood. 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. Dangling equity to startup employees is commonly used as a compelling candidate attraction tool for startups 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. For example, if an employee is given one percent equity in their business, they are entitled to one percent of all shares of stock once the company has gone public.
What kinds of equity are there?
There are several forms of equity that startups and high-growth businesses can offer their employees:
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 startup.
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?
According to UpCounsel, 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 period (usually three or four years) before their equity vests. For startups, vesting periods are commonly deployed to help companies ensure that workers remain with their company for an extended time without fear of a departure.
What does it mean to “go public”?
You might’ve heard of something called an initial public offering—or IPO for short. Going through the IPO process is how a startup can become a publicly-traded company and begin trading on the NASDAQ stock exchange. Once the company’s shares can begin being traded on the stock market, the organization can sell these shares to raise capital—presenting it with considerable opportunities to expand its business, increase the size of its staff, pay off debt, and pursue more strategic and longer-term growth objectives.
Why do companies offer equity?
For growth-stage companies like startups, cash can be hard to come by. Rather than promising to compensate a prospective employee with a high annual salary, an emerging business may choose to provide a lower base salary with an equity stake in the organization. This can serve as a motivational tactic for employees: by earning shares in the company, resources will work tirelessly to promote the startup’s brand and contribute to its growth and development. Startup founders and critical decision-makers know that the harder their employees work, the greater the odds that the company goes public through an IPO.
Are there any downsides to taking equity?
While accepting an offer of employment from a startup where you’re given an equity stake in the company has tremendous upside, it can also be a risky proposition. If the company flames out quickly, you may be left with equity that is worth nothing—potentially costing yourself tens of thousands of dollars in potential earnings versus if you had accepted a job with a traditional company. While you may think the organization can become an ACV Auctions-like unicorn, it’s critically important to view the opportunity with an objective—not subjective—lens.
Equity vs. annual salary: which should you choose?
When formulating an ideal compensation plan, candidates should first evaluate the stage of life they find themselves in.
Are you an energetic young professional with little financial obligations who wants to gain valuable experience in the business world? If so, joining a startup might be for you. Not only will you become incredibly multi-faceted, but you could even secure equity from a startup that could pay dividends down the line.
Are you a seasoned professional with a young family and loads of financial obligations? If so, you may find yourself in a risk-averse stage of life. Accepting a larger share of equity with a lesser base salary is probably not the wisest choice. Unless you’re extremely confident that a startup is going to have a liquidity event, perhaps it would be better to find an opportunity that comes with more of a guaranteed payout.
Are you an industry veteran with decades of experience, but looking to make a change in careers? Perhaps you’re 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, joining an emerging startup could rejuvenate your professional career. And as the saying goes, with more risk comes more reward!
What’s the point?
Before accepting a job with a startup company, do your homework on your prospective employer. Study its product or technology compared to other comparable options on the market. Ask the organization’s leaders about its exit strategy. Discover if the owners have plans to sell the business, or if they want to aggressively pursue an IPO in five years. The company’s responses to these questions should heavily dictate your decision. A well-thought-out exit strategy—if executed properly by senior leadership—could help turn your equity stake into some serious cash. Make sure you are confident in the direction of the startup before agreeing to join the organization. By being prudent—and patient—in your job search, the odds of you making the right decision for your career will drastically improve.
Interested in learning about what makes working at a startup special? Our Forge Buffalo team presents six reasons why you should take a job with an emerging business.
Looking to browse startup jobs with some of Buffalo’s hottest companies? Check out Forge Buffalo’s Job Board today to find an employment opportunity that’s right for you!