How to Evaluate Equity in Company Compensation Packages

Discerning What Matters Most to You When Job-Searching

In today’s competitive hiring landscape, employers hunting for top candidates are dangling the carrot of generous benefits before job-seekers.

It’s a page from Silicon Valley’s book, where tech startups have long been famous for offering employees equity and the promise of earning millions after a successful IPO.

The advertising industry is no exception to this rule. Big brands with in-house agencies are increasingly offering company equity as part of their compensation packages. There are two different types of equity when companies are starting out: Restricted stock awards and options.?

• Restricted stock awards offer shares of ownership in a company to its employees. With restricted stock, while an employee will usually own stock outright upon the date of the award, the company would also have the right to repurchase the stock if the employee’s services end and it has not vested. The longer they stay, the more shares become vested. With restricted stock, employees should complete a tax filing within 30 days (an 83(b) election) of the employee being awarded shares.
• Options allow employees the right to purchase stock at a future date, with a future exercise price fixed at the current fair market value at the time of the award. The longer an employee remains employed with the company, the more stock the employee will have the right to purchase based on the vesting schedule. One watch-out to be prepared for, however, is that companies can freely issue future equity without the employee's input. For example, it’s possible that an employee’s award could initially represent a 5% share in a company, and over time as more equity is issued, the employee’s percentage interest could be diluted to much less.

So what does being offered equity in a company really mean to employees in the creative business? And is it worth it? Here’s what you need to know to compare options and find the best fit for you.?

1. Change Your Negotiation Mindset

First, an important shift in thinking must take place. Of course, employees are seeking the best career and culture fit in their job search, but when it comes to the negotiation phase, you need to think like an investor.?

When considering equity as part of your package, especially with newer companies, do not be afraid to get into the weeds with your potential employer. Questions like: Is the business model currently profitable will save you headaches in the long run. Evaluate whether the employer has a differentiated offering or a unique business model - or whether it has a completely transformative model (think AirBnB, Warby Parker, Dollar Shave Club and the like).

2. Know Key Timelines

To benefit from the equity award made by an employer, you generally have to stay at the company for a certain period of time for the shares to vest and it’s important to know those mile markers.??

A “cliff” is the period of time between when one is awarded the options and the first vesting moment. The cliff is usually one year long, and subsequent vesting periods happen periodically – perhaps quarterly – triggering an employee’s right to purchase more stock (in the case of options).

This may seem no different than a 401k, but advertising is a field known for its sudden shifts, and a change in vision at the top can make people feel like they are trapped just waiting to vest before they can depart. It’s important to ask yourself: If you join, how long can you commit to staying at the company? Could you earn more if you took a position with all the payment upfront elsewhere??

3. Be Savvy in Comparisons

With startups, in particular, equity is often given to allow the company to offer less competitive compensation. If the company successfully goes public or gets bought in a big deal, that may lead to a windfall. There is also the possibility the company doesn’t go public or a major acquisition gets shelved, and you are left waiting for all your shares to have value while earning a below-market-rate salary.

Separately, equity can be offered as compensation when employees are asked to go above and beyond their roles for different assignments (like opening a new office). Overall, it becomes very difficult to view equity as true compensation. Instead, it should be considered a bonus and not compensation for services rendered.

4. Get Ahead of Tax Implications

Even if all goes well, you stick with a company, it is successful and you are able to realize value from your equity award, there can still be unwanted tax implications. It is not uncommon for people to discover they have a large tax bill in these scenarios. Ask an accountant to help you understand the potential tax implications if your employer does go public and you have a ‘windfall.’ Be sure to understand what happens if the IPO is successful but then the share price drops.

When options and equity are a serious part of your compensation package, it shouldn't be an afterthought that you gloss over with minimal understanding. Instead, you need to do your due diligence prior and know what questions to ask, and how to evaluate what will be best for you. Similar to your health insurance, you need to understand what everything means and what the ramifications are.

The main takeaway for workers to know is to tread lightly around the hype that surrounds both big companies and startups alike. Employees often get lost in whether the equity and compensation package makes sense for them both from a career and financial perspective while daydreaming about potential outcomes. Just like any role, focus on the concrete details and the personal factors that will shape your career decisions.