A Basic Guide to Having Equity in Your Company

There are many reasons why a person may choose to work at one company over another. From casual dress codes, unlimited vacation days, and remote work opportunities, today’s job perks run the gamut. But one employee incentive undoubtedly takes the cake regarding recruitment and retention power — equity.

Simply put, having equity in a company means you have a stake in the business and its success. In 2021, major Initial Public Offering (IPOs) like Coinbase, Rivian, and Bumble resulted in thousands of employees owning shares of large enterprises virtually overnight.

With plenty more IPOs on the horizon for 2022, many hopeful employees are considering the likelihood that their stock options and restricted stock units (RSUs) will produce major payouts. Before you start shopping for an island in the Caribbean, there are certain factors to look at when evaluating your equity and your potential benefit.

Equity packages come in many shapes and sizes, from initial signing bonuses to compensation packages and promotions. When considering the pros and cons of joining or staying with a company, you will likely want to evaluate just how lucrative that equity may be in the future. To do that, remember that equity is only valuable if your company is successful; therefore, it’s crucial to think like an investor and consider the company’s growth potential before investing your time and effort.

Return on your equity typically comes as a liquidity action, like an acquisition or IPO. The value produced by one of these exit routes will ultimately drive the return on your equity. Your equity represents a percent of your company, and that ownership as a percentage of the overall company value equals the value of equity you hold.

It’s helpful to look at this in terms of the equation A x B = C, where your percent ownership (A), times the company’s value (B), equals the equity you own (C).

However, due to things like liquidation preferences (which determine who gets paid first and at what return), things may not always be a straightforward equation. Your percentage of ownership is the number of shares you have (or shares you have the option to buy) divided by those fully diluted shares outstanding. While this information is not always readily accessible, you will likely find these figures in your offer letter or the company’s equity management platform, like Carta.

When determining your ownership, it’s also essential to consider the number of shares you own or have the opportunity to own. In this case, vesting and dilution are the two critical things to consider.

Typically, options and RSUs follow a four to six-year vesting schedule, meaning you can’t exercise your option (or pay to turn your option into actual stock) until that vesting date is reached. This comes into play when considering leaving the company before your options are fully vested.

However, many companies have accelerated vesting or early exercise options where options may vest quicker than the typical four-year minimum or become 100% vested in the event of an acquisition. The vesting schedule and terms will be spelled out in your option grant details.

Dilution causes your ownership percentage to shrink, consequently reducing your equity value (think back to the equity equation). Early-stage companies raise multiple financing rounds, thus diluting your piece of the pie as more and more shares are issued to investors. The same thing also happens when more stock options or RSUs are granted to employees.

Not to worry, dilution isn’t all bad news. With early-stage companies, each round of financing creates new value within the company. As the company’s value goes up, your piece of the pie can grow exponentially. Therefore, considering the potential growth and value of your company in the future, particularly at the time of an acquisition or IPO, is a significant factor in examining what your equity may be worth.

Need advice on using equity as an employee benefit? Get in touch with our team of employee benefit experts today.