December 16, 2020

Is Asking for Equity-Based Compensation a Good Idea? Here’s What You Should Know.

As a job seeker, you’ll find yourself negotiating compensation and benefits at some point during the interview process. While most zero in on things like salary, vacation time, and health insurance (with good reason!), there’s another important piece to think about during contract negotiations: equity compensation.

It may not help you afford rent in the present moment, but it could end up paying large dividends later on down the road. Curious about how equity compensation works? Here’s how to broach the topic when negotiating with a potential employer:

What Is Equity-Based Compensation?

When an employer offers equity compensation, what they’re really offering is an ownership stake in the company. This can take many forms, with employee stock options being one of the most common. While some startups and younger companies may not be able to offer big salaries, they may offer equity compensation as the next best thing. Even well-established companies sometimes work equity-based compensation into their benefits packages.

The selling point is that those who have equity in the company are poised to benefit if the organization is eventually acquired or goes public. There is, of course, a catch: Most companies require employees to be vested before they can cash in on the full benefit. That means staying with the employer for a specified amount of time. This stipulation is designed to incentivize employees to stick with the company.

If you get an equity compensation offer you’re excited about, but it comes with a lower starting salary, first check to see if the base pay is workable with your monthly budget. You may be able to find ways to reduce your expenses, like determining whether or not you can lower your student loan payments or consolidate your credit card debt.

The Value of Equity-Based Compensation

According to a 2019 Charles Schwab survey, more than half of employees who recognize equity compensation as important say it’s because equity lets them participate in company growth. Negotiation consultant Devon Smiley also points to the potential financial upside, telling Recruiter.com that even a small piece of equity can be significant if the company takes off or ends up with a big-ticket exit. Look at startups like Ring and LinkedIn, which were both acquired for billions.

“Candidates may shy away from asking for more during a salary negotiation because they’re worried they’ll look greedy,” Smiley says. “When asking for equity, a great reframe is that you’re asking for that percentage because you believe in the company, its mission, and its success.”

In other words, you’re signaling to the employer that you’re so committed to the company’s success you are willing to link your personal financial rewards to that effort. It’s also important to remember that your salary isn’t the only way you’ll be compensated: Benefits account for 30 percent of total employer costs for employee compensation, according to recent data from the Bureau of Labor Statistics.

How to Approach Equity Compensation During Contract Negotiations

Smiley suggests rolling your equity questions into the greater discussion of your total compensation package, right alongside paid time off, flexible work, and professional development support. Something as simple as asking about the company’s general approach to employee equity can be a great starting point.

Once the conversation is moving, be sure to keep your expectations grounded in market data so that you know what to ask for. Smiley suggests combing through job postings on sites like AngelList, which provides information about equity compensation alongside salary in job listings, to get a sense of what other companies in your area and industry are offering for similar roles.

Smiley also recommends reaching out to folks in your network who may have experience with equity compensation. People who work in the startup world are most likely to have some insight.

Just keep in mind that, even if you nail down a great equity compensation package, that doesn’t guarantee a cash payout down the line. It’s always possible the company won’t reach its goals. Moreover, you might end up leaving before you’re vested if the role turns out to be the wrong fit. In this way, equity can be a gamble.

Smiley stresses the importance of looking at the big picture. If the company’s final offer falls short in terms of compensation, benefits, and career development, an equity offer may not be enough to make it worth your while.

Marianne Hayes is a longtime freelance writer and content marketing specialist.

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Marianne Hayes is a longtime freelance writer and content marketing specialist. Since earning her degree in journalism and creative writing from the University of Central Florida, she has published work in Cosmopolitan, Redbook, Good Housekeeping, Forbes, Yoga Journal, and more. In addition to writing, Marianne teaches local storytelling workshops in Tampa and is a hopeless bookworm.