Understanding Equity and Salary
Equity represents ownership in a company and is typically granted as employee share options. Share options allow you to buy company shares at a fixed price in the future. Salary refers to the fixed monetary compensation you receive regularly for your work.
Benefits of Equity in a Startup
Potential Financial Upside: Equity can offer the possibility of significant financial gains if the company becomes successful. In those cases, the value of your equity can far exceed the financial benefits of a higher salary.
Equity Ownership: By having share options, you become a part owner of the company. This sense of ownership can foster pride and a deeper commitment to the company's success.
Risks of Choosing More Equity
High Risk: Working for a startup, especially an early startup, is risky. While equity can lead to significant financial rewards, there is also the possibility that the startup fails or doesn't achieve the expected growth. In such cases, the equity could end up being worthless, which means you don’t get the cash you hoped for.
Limited Cash Flow: Unlike a salary, equity doesn't provide immediate cash. You'll need to wait for specific events like an acquisition, secondary sale, or initial public offering (IPO) to convert your equity into cash. This lack of liquidity can be challenging, especially if you have immediate financial needs or obligations.
Balancing Equity and Salary
Negotiation and Structuring: When negotiating a job offer, try to strike a balance between equity and salary. Consider your financial obligations and personal circumstances while evaluating the amount of equity offered and its potential value. Opt for a base salary that meets your immediate needs while allowing room to invest in equity for future growth.
Diversification: It's wise not to rely solely on one company's equity. It is considered good practice to diversify your investment portfolio by considering other investments outside of the current company you are working for. These investments could be contributions to a retirement fund, buying real estate, or having shares in other companies e.g. through index funds. This can help mitigate the risks associated with having a concentrated equity position in a single company.
Understanding Company Potential: Before making a decision, do some research on the startup. Evaluate its market viability, leadership and growth trajectory. Ensure that the potential of the company aligns with your risk tolerance and long-term goals.
Other Factors to Consider
The Strike Price (also known as the exercise price): It is the fixed price in your grant agreement for which you can buy the company shares when exercising your share options. A lower strike price is usually beneficial, as it allows you to acquire shares at a lower cost, potentially increasing your financial gains. However in some jurisdictions a low strike price can also have adverse tax consequences e.g. in the USA.
Tax Implications: It is important to understand the tax implications of your equity compensation. Depending on your jurisdiction and the type of equity you receive, there may be tax obligations e.g when exercising share options or selling shares. It is always advisable to consult with a tax specialist to fully grasp the tax consequences and plan accordingly.
Vesting Schedule: Equity grants often come with a vesting schedule, which means you need to fulfil certain requirements or stay with the company for a specified period of time before you can fully exercise your options. Be sure to understand the vesting terms, including any cliff periods, to make an informed decision.
Dilution of Ownership: As the startup grows and becomes more successful, it will most likely attract more investors and go through additional rounds of funding. The ownership percentage for existing shareholders as well as option holders will then be diluted. However, this doesn’t mean you will get less cash for your equity. Actually it is the opposite. If the company is successful, it is likely that the value of your share option package will grow, despite the dilution. This is because the rise of the value of shares can often outpace the impact of dilution.
Company Culture and Mission: Evaluate the company's culture and mission to ensure it aligns with your values and long-term career goals. Equity ownership may be more meaningful if you are passionate about the company's purpose and believe in its vision. Consider how the company's culture and mission contribute to your overall job satisfaction and happiness.
Employee Benefits and Perks: Look beyond equity and salary when assessing a job offer. Consider the overall benefits package, including health insurance, retirement plans, vacation policies, professional development opportunities, and other perks. These additional benefits can have a significant impact on your overall job satisfaction and financial well-being.
Choosing between equity and salary in a job offer requires careful consideration. While equity offers financial potential and ownership, it also carries risks in the startup world. Strike a balance between equity and salary, diversify investments, evaluate company potential, and consider factors like tax implications, vesting schedules, company culture and benefits.
Remember, every individual's situation is unique, and what works for one person may not work for another. Take the time to carefully evaluate your own priorities and risk tolerance to determine the right balance between equity and salary in your job decision.