Every compensation discussion comes with an important decision you must make: whether to push for a higher salary or go for more equity.
How do you make the right call?
Well, it comes down to a few different things.
How do you feel about risk? Equity may have a bigger payoff one day — but in the short term it’s more risky.
What are your priorities when it comes to how you’re going to use your compensation? Equity can’t pay your mortgage, but cash can!
In this guide, we’ll explore all the important facts related to both equity and cash compensation and help you think through striking the best balance for your life and financial situation.
The Difference Between Equity Compensation and Cash Compensation
The word “equity” has only recently become a widely-heard term, thanks to the rise in companies offering it as a form of compensation. This is especially prevalent in the tech scene and among early-stage businesses.
Ultimately, equity equates to ownership.
When an employee is granted equity, they become the owner of a percentage of the company.
If a private company does well, employees can sell their equity stake for a pretty penny when it IPOs (goes public)
However, if it doesn’t go so well, they’re left holding unsellable company shares they may not feel represent the hard work and dedication they put in over the years.
This fact right here is why equity is considered more risky than straight cash compensation.
Cash compensation is pretty simple.
There's base salary, which is cash (typically in the form of a check or direct bank deposit) employees receive in exchange for doing a job. Typically, this makes up the majority (85% on average) of the total compensation an employee earns.
The rest typically comes from what’s known as variable pay. This type of cash comp includes commission payments, bonuses, etc.
Most Popular Types of Equity Compensation
Let’s talk about the most common types of equity job seekers today may be offered.
Stock Options
Stock options are something most of us have heard of by now, and they’re probably the most typical form of equity compensation. Employee stock options are “promises” that an employee can purchase a certain number of shares at a certain share price (strike price or exercise price) after a certain goal is met.
Usually this goal is related to the amount of time at the company, which is called a “vesting period.” Today, it’s pretty common for this vesting period to last four years with an initial one-year cliff during which no vesting happens.
There are non-qualified stock options (NSOs) and incentive stock options (ISOs) — make sure you get familiar with the tax implications of both if you’re offered options.
Equity Shares
Equity shares are even more straightforward. There are no options, no vesting schedule, and no stock market purchase required. Instead, employees are simply given shares as an element of their compensation. These may be used by companies when they need to pull out the “big guns” to win over a particularly high-value candidate.
Restricted Stocks
Restricted stocks (not to be confused with restricted stock units — RSUs) are like a combo of the above equity comp types. Restricted stocks are usually reserved for executives. They are non-transferable, usually include a vesting period, and can come with other conditions.
Employee Stock Purchase Plans
These company-administered plans allow employees to buy company stock at a discount below market value. Participating workers contribute to a fund via payroll deductions, then the company uses that fund to purchase stocks on behalf of participants.
4 Things to Do to Balance Equity vs. Cash Compensation
Preferences, priorities — as we mentioned earlier, there are lots of reasons behind why someone might push for a certain blend of cash and equity when it comes to their compensation package.
If you’re not sure where the best blend lies for you, here are some steps to take to clarify where you are, where you want to go, and how you want to get there.
Understand Where You’re At
Time to set a baseline. To move toward a goal, you have to know where you started.
That means understanding what’s in your portfolio today, tracking how it’s performed over time, and creating forecasts based on different comp options.
Where do you even start?
It all begins at Kubera.
Kubera’s personal balance sheet platform is a critical tool for gaining visibility into your portfolio and its overall performance.
Here’s how to start using our intuitive yet powerful interface:
1. Check out our pricing to ensure we align with your budget, then sign up and set up your profile.
2. Now, start getting all those account-based assets into your new dashboard. We’re talking bank accounts, brokerage accounts, and beyond. Kubera’s platform integrates with thousands of financial institutions, so once you’re logged in, you’ll get to watch your accounts update in real-time.
3. Time to input all those other things you own. From alternative assets like real estate and crypto to collectible investments like baseball cards and antiques — almost anything you have can be tracked with Kubera! Our spreadsheet-like interface makes it easy to keep everything’s value and details up to date.
For a view of how all those assets are doing compared to what you initially shelled out for them, there’s our IRR for investments calculator.
On top of that, Kubera’s detailed Recap screen is all about giving you a granular view into changes in net worth and asset value over time. This is helpful when it comes time to forecast future growth.
Worried about what may happen to your assets and portfolio if you’re suddenly incapacitated and don’t have time to give someone else all the deets? Our team had the same thought, so we created a unique beneficiary management feature. This enables you to choose who will automatically get access to your portfolio once you’re no longer able to manage it.
Together, Kubera’s features work as a singular source of truth when it comes to your portfolio, giving you the insight you need to make important decisions around investments and, of course, compensation.
Define Your Necessities
Next up, think about all those things your compensation goes toward.
Making regular payments on high-interest debt?
Depending on a regular paycheck to cover groceries, tuition, or house payments?
Saving for retirement?
Unfortunately, you can’t pay for any of these things with employee equity.
If your lifestyle is dependent on having guaranteed cash flow, your compensation considerations must start with making sure you’ll make enough cash for all the necessities.
If you’re able to negotiate a cash salary that more than covers all these things, then you can consider working in some equity as well.
Outline Your Goals
We’ve got baselines and necessities covered. Now let’s talk about your personal finance goals, and how your compensation choices may impact them.
Retiring Anytime Soon?
There's always a chance that equity doesn’t end in a huge payout. Or, even if it does, that it will take a lot longer than you were prepared to wait.
For those nearing retirement, choosing to take on equity instead of the sure thing — cash — has the potential to limit your liquidity and really turn your plans upside down.
Is Making the Most Money Possible the End Goal?
For some readers, getting rich may be the ultimate goal.
For you, prioritizing equity may be the way to go.
After all, billionaires almost never get to the level they’re at from cash salaries. They get there by having a stake in companies that do really, really well.
Grinding vs. Work-Life Balance: Which Will You Choose?
Another thing to consider is the lifestyle you want to live.
Often, the expectation with high-equity roles is that you’ll put your blood, sweat, and tears into them. And of course, your performance may have a real impact on what your equity is worth someday.
If you want to live a slower-paced life where time off doesn’t impact your income and there’s less chance of you getting interrupted during that time off, you may find that taking more cash compensation gives you more separation from the “grind.”
Are You Looking to Boost Career Opportunities?
Sometimes, you might just have to take what’s on the table to get where you want to go in your career.
For example, let’s say there’s a really great role at a really great startup up for grabs. It would be a meaningful title bump for you. However, since it’s such a new company with low cash reserves, the compensation plan consists of more equity than you’d usually take. In a case like this, where the opportunity is worth a lot to you, you may have to trade off finding the perfect balance and find a way to work with a lower salary.
Determine Your Risk Profile
We’ve talked a lot about the relationship between risk and equity.
But what if you aren’t really sure how you feel about taking financial risks in the first place?
To determine your risk profile, you want to get to the bottom of two main things:
- Risk capacity: Whether you can afford to take a risk, objectively.
- Risk aversion: How you handle risk, psychologically.
To learn more about what risk means in the financial space and to find your tolerance with the help of an automated calculator, check out this guide (no affiliation).
Let Kubera Help You Find Your Balance
Making wise financial decisions is all about having the right information.
What could provide better information than a platform built to give you ultimate insight into your assets and their performance?
Kubera is here to help you find the right balance in your financial life. Sign up to access the platform on web, iOS, and Android.
Your financial advisor can even implement Kubera into their workflow via our professional white-label solution to provide clients — including you! — with more informed guidance.
