Shravan Kumar

In today’s candidate-driven job market, there exists intense rivalry among competing companies to secure top-notch talent. A widely established approach employed by employers to lure potential candidates was to provide generous remuneration packages. However, a new trend is gaining momentum, especially among startups, involving supplementing a modest base salary with equity compensation in the company. It is crucial to thoroughly comprehend the advantages and disadvantages associated with equities and salaries before arriving at the ultimate offer.So what exactly is Equity, and how is it different from a SalaryBefore comparing the two, we need to delve a little bit more into equities and understand what they are and how they benefit you. Equity compensation gives employees a partial stake in the company and allows them to share in the profits via appreciation. Generally, three types of equity compensation are awarded to employees - Stock options, Employee stock purchase plans, and Restricted stock. Stock options allow the employee to purchase company shares at a later date but at a lower, agreed-upon price, thereby enabling them to get shares at a discount. Employee stock purchase plans enable employees to use after-tax payroll deductions to buy their company's stock, usually at reduced prices. In the restricted stock option, the employee is given shares of the company as part of the compensation which can be vested only after certain conditions are met.&nbsp;In most cases, equity compensation comes with a vesting schedule, which means the ownership is transferred to the employee only after a certain time period has elapsed. In contrast, a salary is a fixed guaranteed income that an employee receives right from day one. This remuneration is determined by factors such as the employee's level of expertise and the value they bring to the company. Salaries typically rise incrementally over time, contingent upon the individual's performance. Compared to equity compensation, salaries are more liquid, secure, and stable, thereby ensuring a more dependable source of income for risk-averse individuals.Upsides of Equity-based Compensation<ul><li>Equity is a very useful add-on to salary, as it can give great returns in the long run. This is true, especially with startup companies, whose businesses have the potential to do well down the line. Companies that have progressed to file IPOs (such as Google, META, etc.) have made their employees overnight millionaires!</li><li>By committing to hard work and exercising patience, individuals open up the potential to earn substantial amounts of money. This allows one to work diligently and stay with the company, gain financial freedom, and probably take early retirement.</li><li>There could be some tax sops offered for those holding certain types of equities.</li><li>It is easier to become a shareholder in the company without spending much out of pocket.</li><li>After becoming a company shareholder, the employee gets to take part in important decision-making and also play a key role in the company’s overall growth and development.</li></ul>Drawbacks of Equity-based Compensation<ul><li>Even though equities have the potential to provide high returns, there is no guarantee that it will actually happen. If the company does not do well, the value of the shares goes down. If the company shuts down, the share value become zero.</li><li>A lot of patience and hard work is required to reap the benefits of equities. It’s crucial to exercise the equity at the right time to make the most out of the investment.</li><li>Equities take time to grow and the employee has to stick with the company long enough to claim the financial benefits. They also have to keep performing well, or else they risk losing their entire stake if they get fired from the job.</li><li>Payment of taxes can sometimes become an overhead, nullifying the impact of the gains.</li></ul>Choosing the Best Compensation PackageCandidates should make a careful assessment of where they currently stand with respect to their careers and their financial obligations before deciding on the most optimal compensation package.&nbsp;<ul><li>For junior professionals, who have their entire career in front of them with minimum financial commitments and a wealth of knowledge to acquire, joining a startup might be a good option. The experience of working in a startup will not only prepare them for a long career ahead but will also help them create a portfolio of financial assets as they progress into later life.</li><li>For senior, experienced professionals with a young family and a lot of responsibilities, it would be sensible to be in a risk-free zone by being in a stable job that provides secure and stable salary payouts. It may be advisable to seek out an opportunity that offers a guaranteed payout rather than join a startup unless one is highly confident that the startup will experience a future liquidity event.</li><li>For seasoned industry experts, who have decades of experience behind them, making a transition to an up-and-coming startup might be enticing to leverage their expertise and help grow the business while also taking up leadership roles that may not be possible in a big enterprise. This move entails some risk, but, due to their vast experience, they will be in a better position to make a sound judgment on the future potential of a startup organization.&nbsp;</li></ul>Understanding the precise structure of the equity compensation plan is crucial, as it could potentially lead to a significantly larger payout based on the form of compensation and the extent of ownership in the company. Tax considerations are an additional factor to bear in mind, as they can differ depending on the compensation package in question. It's also important to put some serious thought and analysis into the company’s current valuation and future projections.

Companies search for any edge they can get when making proposals to potential employees in today's competitive labor market. Giving candidates the choice to receive equity in addition to their salary is one of the tactics being used more frequently. This article will help you to know the nuts and bolts of salary vs equity! Read on.

Salary vs Equity: Which one should you choose?

Giving candidates the choice to receive equity in addition to their salary is one of the tactics being used more frequently by organizations these days. Is it worth it?