Tag: Equity Compensation

Equity compensation, which refers to the granting of stocks or stock options to employees as part of their pay, can have several advantages and disadvantages compared to salary compensation.

Always Try To Get Some Equity Compensation

Pros And Cons Of Equity Compensation

Pros of equity compensation:

1. Potential for significant financial gain: If the company’s stock price increases significantly, equity compensation can be worth much more than the employee’s salary.
2. Alignment of interests: Equity compensation can align the interests of employees with those of the company and its shareholders, as employees will benefit from the company’s success.
3. Retention tool: Equity compensation can be a valuable retention tool, as employees may be less likely to leave a company if they have a stake in its success.

Cons of equity compensation:

1. Risk of loss: If the company’s stock price decreases or the company goes bankrupt, the value of the equity compensation may be lost.
2. Complexity: Equity compensation can be complex and may require the assistance of a financial advisor to fully understand and manage.
3. Limited liquidity: Employees may not be able to sell their equity immediately and may have to wait for certain vesting periods or meet other requirements before they can access their equity.

Overall, equity compensation can be a useful tool for attracting and retaining talent, but it is important for employees to carefully consider the potential risks and rewards before accepting it as part of their pay.

Because of the risks of equity compensation, it is wise to not sacrifice salary beyond what you need for your day to day expenses.

Nonetheless because of the strong potential upside it is often a good idea to integrate some equity compensation when possible, especially if you think the company your work for is well run and has a great future in front of it. In fact most of the investing dry powder Mr. Honu was able to accumulate did come from equity compensation from a well established publicly traded company.

There are several factors that employees can consider when assessing a company’s viability and determining whether equity compensation is worth it:

1. Financial health: Employees can review the company’s financial statements, such as its income statement, balance sheet, and cash flow statement, to get a sense of the company’s financial health. Key indicators to look for include profitability, cash flow, and debt levels.
2. Market conditions: Employees should consider the market conditions in which the company operates, including industry trends and the overall state of the economy. A company that is well-positioned in a growing market may be more attractive than one that is struggling in a declining market.
3. Management team: The management team’s experience and track record can be an important factor in the company’s viability. Employees should consider whether the management team has a history of successfully navigating challenges and achieving growth.
4. Competition: Employees should consider the company’s competitive landscape, including the number and strength of its competitors. A company with a strong market position and a differentiated product or service may be more attractive than one that is struggling to compete.
5. Potential for growth: Employees should consider the company’s potential for growth and its plans for the future. A company with a strong growth strategy and a clear vision for the future may be more attractive than one that is struggling to find its footing.

Ultimately, it is important for employees to carefully weigh the potential risks and rewards of equity compensation and to consult with a financial advisor if necessary.

If you assess that the company you work for may not be suited for equity compensation or does not offer equity compensation, you really want to start thinking if your time is worth working for such company. It may be time to look around for stronger companies to work for that would give you better opportunities.

RSUs, stock options, and SARs are all forms of equity compensation that can be granted to employees as part of their pay. They are the most common type of equity compensation and here is a brief overview of each:

1. RSUs (Restricted Stock Units): RSUs are a form of equity compensation that give employees the right to receive a specified number of company stocks at a future date, subject to certain vesting requirements. The employee does not receive the actual stocks until the vesting period has been completed, and the value of the RSUs is based on the company’s stock price at the time of vesting.
2. Stock options: Stock options are the right to buy a specified number of company stocks at a predetermined price (the “strike price”) within a certain time period. There are two types of stock options: “incentive stock options” (ISOs) and “non-qualified stock options” (NSOs). ISOs have certain tax advantages, but they are only available to employees and can only be exercised after a vesting period. NSOs can be granted to anyone, including contractors and consultants, and can be exercised immediately.
3. SARs (Stock Appreciation Rights): SARs are a form of equity compensation that allow employees to receive a payment based on the appreciation in the value of a specified number of company stocks. Like stock options, SARs have a vesting period and an expiration date. However, unlike stock options, which require the employee to purchase the stocks at the strike price, SARs allow the employee to receive a payment in cash or additional shares of stock based on the difference between the strike price and the current market price of the stocks.

It is important for employees to carefully understand the terms and conditions of any equity compensation they receive, as they can have significant tax implications and other consequences.

Restricted Stock Units (RSUs) are a form of equity compensation that give employees the right to receive a specified number of company stocks at a future date, subject to certain vesting requirements. In this article, we will explore how RSUs work and the key features and considerations that employees should be aware of when receiving RSUs as part of their pay.

How RSUs work:

1. Grant: The company grants a certain number of RSUs to an employee as part of their pay. The grant may be subject to certain vesting requirements, which specify the length of time the employee must work for the company before they are entitled to receive the RSUs.
2. Vesting: The vesting period is the time during which the employee must meet certain requirements in order to receive the RSUs. This may include staying with the company for a certain period of time or meeting certain performance goals.
3. Settlement: Once the vesting period has been completed, the employee becomes entitled to receive the RSUs. This is known as “settlement.” The number of RSUs that the employee receives is based on the company’s stock price at the time of settlement.
4. Taxes: RSUs are considered taxable income and are subject to federal and state income taxes. The employee may also be subject to payroll taxes on the value of the RSUs.

Key features of RSUs:

1. Value: The value of RSUs is based on the company’s stock price at the time of settlement. If the stock price increases between the time the RSUs are granted and the time they vest, the value of the RSUs will also increase.
2. Dividends: Some RSUs may be eligible to receive dividends, which are payments made by the company to its shareholders. The terms of the RSUs will specify whether the employee is entitled to receive dividends on their RSUs.
3. Transferability: RSUs may be transferable or non-transferable. Non-transferable RSUs can only be exercised by the employee who received them, while transferable RSUs can be transferred to another person or entity.

Considerations for employees:

1. Tax implications: As mentioned above, RSUs are taxable income and are subject to federal and state income taxes. It is important for employees to carefully consider the tax implications of receiving RSUs and to consult with a financial advisor if necessary.
2. Vesting schedule: The vesting schedule for RSUs will specify the length of time the employee must work for the company before they are entitled to receive the RSUs. Employees should carefully review the vesting schedule to understand their rights and obligations under the RSUs.
3. Company performance: The value of RSUs is tied to the performance of the company’s stock. If the stock price decreases, the value of the RSUs will also decrease. Employees should consider the company’s financial performance and potential risks before accepting RSUs as part of their pay.

In summary, RSUs are a form of equity compensation that give employees the right to receive a specified number of company stocks at a future date, subject to certain vesting requirements. They can be a valuable form of pay, but it is important for employees to carefully consider the terms and conditions of the RSUs and to understand the potential risks and rewards.

Stock options are a form of equity compensation that give employees the right to buy a specified number of company stocks at a predetermined price (the “strike price”) within a certain time period. In this article, we will explore how stock options work and the key features and considerations that employees should be aware of when receiving stock options as part of their pay.

How stock options work:

1. Grant: The company grants a certain number of stock options to an employee as part of their pay. The grant may be subject to certain vesting requirements, which specify the length of time the employee must work for the company before they are entitled to exercise their stock options.
2. Vesting: The vesting period is the time during which the employee must meet certain requirements in order to exercise their stock options. This may include staying with the company for a certain period of time or meeting certain performance goals.
3. Exercise: Once the vesting period has been completed, the employee may choose to exercise their stock options. This means that they will buy the specified number of company stocks at the strike price.
4. Taxes: The employee may have to pay taxes on the difference between the strike price and the market price of the stocks at the time they are exercised (this difference is known as the “spread”). The employee may also be subject to payroll taxes on the value of the stocks.

Key features of stock options:

1. Strike price: The strike price is the price at which the employee can buy the company’s stocks as part of the stock options. The strike price is typically set at the market price of the stocks at the time the options are granted.
2. Expiration date: Stock options have an expiration date, which is the last day on which the employee can exercise their options. If the employee does not exercise their options by the expiration date, they will expire and the employee will lose the right to buy the stocks at the strike price.
3. Two types: There are two types of stock options: “incentive stock options” (ISOs) and “non-qualified stock options” (NSOs). ISOs have certain tax advantages, but they are only available to employees and can only be exercised after a vesting period. NSOs can be granted to anyone, including contractors and consultants, and can be exercised immediately.

Considerations for employees:

1. Tax implications: The tax implications of exercising stock options can be complex and will depend on the type of options and the spread between the strike price and the market price at the time they are exercised. It is important for employees to carefully consider the tax implications of exercising their stock options and to consult with a financial advisor if necessary.
2. Vesting schedule: The vesting schedule for stock options will specify the length of time the employee must work for the company before they are entitled to exercise their options. Employees should carefully review the vesting schedule to understand their rights and obligations under the stock options.
3. Market conditions: The value of the stocks underlying the options will depend on market conditions. If the market price of the stocks is below the strike price at the time the options are exercised, the employee may lose money on the transaction. Employees should consider the market conditions and the potential risks before exercising their stock options.

In summary, stock options are a form of equity compensation that give employees the right to buy a specified number of company stocks at a predetermined price within a certain time period. They can be a valuable form of pay, but it is important for employees to carefully consider the terms and conditions of the stock options and to understand the potential risks and rewards.

SARs