What is equity and how do you negotiate for itOct 06, 2022
You should consider more than salary when you’re negotiating for a new job. It’s your total compensation that affects your work-life balance, not just your annual pay. Compensation is more than just paid time off, health benefits, and a professional development budget.
Have you ever asked about – or been offered – equity in a company?
Do you even know what equity is? Well, you should. And here’s why.
Getting equity from a company means you own part of the company.
Equity is the value of shares from a company. Shareholder’s equity is the total assets of a company subtracted by the company’s total liabilities.
Essentially, it is what the company is worth after deducting any liabilities.
Let’s say you work at a company that gives you 3% of shareholder’s equity. If your company closes because it's selling its assets in a partnership, you’ll lose your source of income, collect your severance – and you’ll also get that portion of the company’s net income in stocks.
Shareholder equity is the most common form of equity compensation. It is likely you will be offered it if you seek equity within your employee benefits. Here are a few components to consider:
Outstanding shares is the number of shares all the company shareholders own, from investors to employees. Companies are legally required to make their shares publicly available.
This can be found on a company’s financial balance sheet under capital stock.
Retained earnings are also known as a retain surplus, which is the income a company earns that they can keep instead of paying out shareholders. These are usually the highest figures in shareholder’s equity.
This can be found on a company’s balance sheet at the end of each accounting quarter.
Treasury stock is also known as treasury shares. They represent the shares a company repurchases from investors after issuing them for the first time. A company could decide to sell them to raise capital or stop major changes in the company’s business. This reduces total shareholder’s equity.
This can be found in the shareholder equity section of the company’s balance sheet, represented by a negative number.
Additional paid-in capital
Additional paid-in capital is the difference between the original stock price and the price the company sells a stock for. It is the money an investor pays above the original stock price Only shareholders who buy shares from a company directly can have additional paid-in capital.
This can also be found on the equity section of the company’s balance sheet.
Calculating and paying out equity
Equity is paid out in two ways: vested equity and granted stock.
Vested equity: Payments are made over installments as decided within the contract
Granted stock: Stocks are provided at the beginning of a the contract
Employees can get this compensation by either buying shares of the company stock at the present or discounted price. However, this is usually only possible after a certain period of time with the company to keep people from buying stocks then leaving their contracts.
As a shareholder of your company, you earn money from the company as it grows. You’ll be asking for a percentage of the company. Here are some equity ranges for different employee levels based on a tech start-up in Silicon Valley:
- CEO: 5–10%
- COO: 2–5%
- Vice president: 1–2%
- Board member: 1%
- Director: 0.4–1.25%
- Lead engineer 0.5–1%
- Senior engineer: 0.33–0.66%
- Manager or junior engineer: 0.2–0.33%
This is by no means the standard, but it does provide an idea of typical equity options.
If this company has $5,000,000 million in total assets and $2,000,000 in total liabilities, you will have a percentage of the difference, according to what you negotiate.
Shareholder equity = $5M (assets) - $2M (liabilities) = $3M
If you’re joining the company as a lead engineer and you negotiate 1% equity in the company, you own 1% of the company valued at $30,000.
Learning more about the company
To have an idea of what your shares could look like, you need to learn more about the company. If you have a strong background in business (or have a friend or mentor that does), you should ask your future employer for their business strategy. Assessing company objectives, quarterly plans, and annual timeline could help gauge the potential for success.
If the company has successful founders and managers whose history shows business acumen, this could be a good sign for you.
You can also go to the company’s financial information for answers. Online you can typically find out about the value of the company, the amount of investors it has, how many banks and venture capitalists have backed the company, and if the company’s financing can offset its liabilities so you end up with more.
If you’re still unsure, try asking around your network about compensation packages that include equity. Match your prospective company to similar companies in your network to find patterns or develop the idea of a standard equity package to pursue when you begin negotiating.
Finally, you can just ask your management. What is their opinion on their business growth potential? How many shares of the company do they have?
Once you have an idea of the type of company you’re working with, it’s time to start negotiating.
Getting shares of a company could be great for you, but shouldn't be done at the expense of getting a salary you need to live comfortably. Unless you are confident the share payout will be substantial, you receive compensation during an optimal time (periodically rather than after a 3-6 month probation or vested period), and you have the margin to take a lower salary, be mindful about what you agree to.
After all, equity is the income generated after a company settles, liquidates, merges, or is acquired by another company. You want to be sure that whichever way the business moves, you are not on the short end of the stick.
Think about what type of company you’re working in. Is it a start-up? You have to consider that 90% of start-ups fail. However, equity options are typically offered for positions in start-ups.
In fact, some companies will count on being in the early stages of the business with less money and will offer equity instead. Someone joining during start-up mode may be less likely to jump ship or hope for the company to fail just to cash out, so companies could be eager to offer equity instead of a larger salary.
Or is it a Fortune 500 company? This will impact how much money you will get with the annual net income.
If the company’s future points to a merger, acquisition, or foreclosure, consider what your options could be worth with this stock options calculator.
Source: LTSE Equity
If the company is public, you can also search for the current stock price to figure out how much the shares are worth.
Equity options also raise loyalty and commitment with employees because there is more ownership and accountability in the company’s wellbeing. When employees are closely tied to the company, not only by salary but by a portion of its earnings, they are more likely to work more and perform better.
Equity share schemes have key benefits like retaining employees, increasing productivity, aligning teams, promoting better company culture, and attracting strong talent.
Making your decision
Before you close the negotiation conversation, consider what other benefits to bring to the table if equity seems unlikely. Besides base salary, there is health insurance, an annual bonus, a signing bonus, relocation costs, phone stipends, car allowances, and more.
If you have been offered the job and you have time for deliberation, you can also enlist the help of a lawyer to review your contract before signing.