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Understanding equity compensation

From: Negotiating Your Salary

Video: Understanding equity compensation

If you're interested in working for a startup organization, equity may come into your negotiation. Equity compensation is a complicated subject. I'm going to share with you a few definitions and several resources for more information. Equity is non-cash compensation in the form of interest or ownership in the company. The company assumes that equity contributes to their long-term growth strategy, and helps them retain employees. The second term is stock, which is a partial ownership in a company.

Understanding equity compensation

If you're interested in working for a startup organization, equity may come into your negotiation. Equity compensation is a complicated subject. I'm going to share with you a few definitions and several resources for more information. Equity is non-cash compensation in the form of interest or ownership in the company. The company assumes that equity contributes to their long-term growth strategy, and helps them retain employees. The second term is stock, which is a partial ownership in a company.

There are two types of stocks: common and preferred. If a company is sold, preferred stockholders will get paid first and then if there is anything left over, the common stock is paid out. Unless you're an executive level or an investor, you're not going to be offered preferred stock. Most equity offers contain common stock. The company may also offer you stock as an option. This means that you'll be able to purchase the stock at a future date at a fixed price.

Stock options are often partnered with vesting conditions. Vesting means that you gain control over the stock after a period of time. This usually is around three to five years. During the vesting period, employees cannot transfer or sell stocks. There also maybe vesting conditions which may include continued employment and meeting performance goals. If the vesting terms are not outlined in the offer, ask for more details. Another term you should be familiar with is dilution.

Companies raise new money by issuing stocks. But this causes the previous stock issued to lose value and become diluted. Negotiate for the most equity upfront as your stocks will most likely dilute over time. Startups often think of compensation as the total package of the salary, plus stocks. However, you need to remember your bottom line in the negotiation. Remember, no matter what equity offers an employer may make you, you have to make your minimum salary.

Equity compensation can be difficult to understand. Here are a few online resources that have more information on equity compensation. Investopedia is a good resource for defining financial terms and goodwinfoundersworkbench.com specializes in startups, in technology, and life sciences.

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Negotiating Your Salary

16 video lessons · 11741 viewers

Valerie Sutton
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