The Pros and Cons of Equity Compensation
It's become increasingly common for companies to offer equity, or company stock, as a way to attract and retain quality talent. This compensation option could be high-risk since you're likely forgoing secure, predictable cash income in exchange for a presumption on the future value of that company stock.
However, if the company takes off and becomes highly profitable, this path could lead to significant rewards. Weigh the pros and cons of equity compensation by asking the right questions and then consider your options carefully.
Understand the basics.
There are many ways to set up equity compensation, so keep track of all the particulars by getting answers to the big questions. What kind of equity is on the table? Common, preferred, issuing shares or warrants? When will the stocks be yours? Right away, or will they vest to materialize over the years? These details impact your potential tax bill.
Consider your current needs.
Would a higher income of steady, predictable cash do more heavy lifting for your financial situation today? If so, equity compensation may not be ideal. If your immediate needs are well cared for and you have a higher tolerance for uncertainty, an employment offer with equity compensation might be a good fit.
Read the fine print.
Financial terms like "grant," "exercise" and "vest" represent important aspects of equity compensation, so acquaint yourself with what they mean. Going a little further, remember that non-qualified stock options don't offer the same tax advantages as incentive stock options, but they may offer more flexibility for senior, high-earning talent.
If you're given the option to accept equity compensation, above all it's important to work with your team of legal, tax and financial professionals to make sure you're making the best choices for your financial future. Please reach out if you have questions.