Equity share :
If you are on the verge of joining a startup, ‘equity compensation’ would be the single most incentive a firm would attract you towards. Startups are known for their bankrupt bank accounts and their needs to develop the product with the existing cash. This renders the employees an incomplete or a cut-down salary or in a more raw stage null salary incentive.
Since your salary cash is going to be less than the market rates, the startup firms assure you a little stake in the situation. Equity compensation helps the firm save some cash and improve the product and operations. Now, hands down to those who are weighing an equity – Keep in mind equity has it’s own risk and benefits.
Risk and Benefits of Equity share over salary:
1. Equity share is not hot-cash but a steady walk to money:
The main risk of equity compensation is that you are not guaranteed to benefit from the stakes. There are a lot of factors that affects the stock price and in-turn your equity benefit values. Firstly, your startup has to succeed and remain in operations. In case your startup shuts down, despite your efforts, your stake value flows down to zero. Contrarily, assuming your startup succeeds and acquires enough consumers, there is a high chance for your stock price to riseup.
Let us look at an example,
When amazon entered IPO initially, it’s stock rate was $15 on an average which is same as the stock owned via equity by employees. Coming down to 2016, each stock of amazon worth $713. That’s a huge increment and thus, the employees who had worked for amazon intially with equity compensation would be able to gain a lot. That is how equity compensation works and benefits you.
2. Varying Equity share Structure and Tax hurdles:
You can be compensated with equity either in form of ‘Incentive Stock Option’ (ISO) or in the form of ‘Restricted Stock Units’ (RSU). Each form of equity compensation packages a different tax consequence. It’s always good to listen from the firm about the type of compensation offered.
Jumping onto explaining the tax hurdles, let me tell you, equity defines your net worth. You will be stuffed with the tax burden even though your stock value falls. Thus, it’s real important to know when to cash-out your equity for cash and when to save it in form of equity itself.
Equity share payments allow startup to manage financial struggles, when the firm could not afford to pay its employees. While Equity compensation lures the eyes in the form of huge cash tomorrow, it is badly subject to higher risk factors. Equity Compensation is a very strong platform for startup firms to keep their employees motivated with less payouts.