Should start-up employees take equity as compensation?
Fast-growing companies are often famous for enticing new talent by offering them an equity stake in their business.
For the employees, it can be an attractive proposition, especially if the company is on the road to becoming a unicorn. However, with companies now staying private for many years, employees can be left waiting a long time to turn their share in the business into cash.
Fortunately, the market has recognised this, and developed new ways for employees to monetise their equity.
What is equity?
If you receive equity in a business, you’re getting a share of the ownership of the company.
Start-ups may offer equity in lieu of a high or market-rate salary when they don’t have much cash to spare. Unlike a salary – which often represents a big expense and cash drain – equity can be issued without affecting the fledgling company’s cash flow.
Often, the employee’s equity is paid out in cash when the company floats or is acquired by a private equity firm or competitor.
Benefits of equity compensation
For start-up employees committed to the company’s journey, equity can be appealing for a number of reasons:
- Return potential – If the company continues to perform well, equity benefits could eventually give the employee a very nice payday.
- Ownership – As a part owner of the company, employees may be more engaged with the company’s actions and goals than salaried employees.
- Career development – Equity-compensated employees have a vested interest in the company’s growth, which may help inspire peak performance.
- Tax advantage – Generally, equity schemes can have more advantageous tax treatment than cash salaries.
Risks of equity compensation
There are also certain downsides and risks involved with equity compensation, including:
- Illiquidity – Employees can become stuck in a situation where they are unable to realise their equity and cash out until the company floats or is bought out, which can take many years.
- Concentration risk – Employees can end up with all their ‘eggs in one basket’, which can become a problem if the company fails.
- Salary opportunity cost – Employees may have to forego the flexibility and choice that comes with a good cash salary.
How to decide what is best for you
What’s right for you depends on your personal circumstances. Some people will find that equity compensation suits their needs and future goals, while others may need a better salary.
How PrimaryMarkets is helping employees realise equity compensation
Recognising the growing desire for liquidity, we created a platform where employees can sell their shares in private companies.
Employees or other private shareholders can list their shares for sale on the PrimaryMarkets platform and we will promote the opportunity to our network of global, sophisticated investors.
There are two ways this can happen:
- The company joins the PrimaryMarkets platform, which enables eligible employees to list their shares.
- Individual employees or shareholders are eligible to sell on the platform and list their shares.
In addition to employees, investors clearly benefit from the model, too, with the chance to buy into a range of flourishing start-ups.
Check out the Secondary Markets section on the PrimaryMarkets platform today to see other equity opportunities already trading. Read more about trading on Primary Markets here.