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Should You Accept Equity Compensation in Lieu of a Higher Salary?

August 16, 2018 by Jay Willwerth, ChFC®

Dreaming of getting rich? To increase your chances of that dream coming true, you may want to consider equity compensation rather than focusing entirely on earning a higher salary. Think about the billionaires in the world. How did they make their wealth? Almost all of them got their high net worth from equity stakes in businesses that grew into successful companies.

But with the potential reward comes significant risk. Which is better for you, equity compensation or a higher salary?

Why consider equity compensation?

Equity compensation is especially common in startup firms and relatively young companies, each known for needing to preserve cash. Often, they’ll offer equity compensation in return for giving you a below-market salary. With you having a stake in the company, your potential earnings are virtually limitless.

Even the professions that earn the highest-salary.  Such as investment bankers, hedge fund managers, doctors, and prominent lawyers. They don’t crush it with their six-figure salaries until they become partners in their respective firms or practices. When you become a partner, that’s when you tap into the magic of equity.

Owning equity means you’re essentially part-owner. And when you’re an owner, your success grows as the company grows. If it’s a business that climbs to the top of its market, your options for wealth building skyrocket and your dream of getting rich becomes a reality.

If you find yourself weighing an equity compensation possibility, here are three points to consider.

1. It isn’t the same as money in the bank

With your success directly tied to the success of the company, there’s no guarantee that you’ll gain from your equity. When you get a salary, you know exactly how much you’re getting. It’s a fixed sum that you can count on and use to plan your future. However, there are too many variables that influence whether your equity stake will pay off.

The first variable is that the startup will have to succeed for your stake to pay off. Since more than 50 percent of small businesses fail in the first four years, you could end up high and dry. Equity compensation isn’t the same as money in the bank.

2. You may find yourself tied to the company

Changing employers, or even career fields, is common. According to data collected by the United States Department of Labor, people shift employers between ten to fifteen times during their lifetime. If part of your compensation is in the form of equity; it’s critical you know the vesting schedule and rules surrounding your potential payoff. In fact, you may lose your stake entirely if you take a new job.

Equity compensation typically has a vesting schedule, meaning you won’t own your equity until a period of time has passed. Whether you’re considering leaving your employer due to a new job, layoff, or retirement, you need to know what that schedule is. For example, if you’re offered a “four-year vest.” Your equity is given over a period of four years.  If you get fired or leave a day before that period is up.  You’ll end up with nothing.

3. Consider tax implications

Understanding the structure of your equity compensation could lead to a bigger payout. However, it can also calculate to a lesser amount after you pay taxes. The Internal Revenue Code does allow for limited amounts of qualified stock options. These options are eligible for special tax treatment under certain conditions. However, if the value increases substantially over the fair market value at the grant date, you could be taxed at capital gains rates which increases your tax liability.

Equity payments are structured in a variety of ways. These can include nonqualified and incentive stock options, restricted stock units, stock appreciation rights, performance shares and units, and dividend equivalent units. Each has different tax considerations at the federal and state level.  Each of these can be cumbersome and costly if the tax consequences aren’t adequately addressed.

Either way, there are no guarantees

Choosing between cash salary and equity compensation is a personal decision that should be based on your individual cash flow needs. A lower wage could leave you living paycheck-to-paycheck and hurt your quality of life.  Ownership is one of the best ways to create wealth and equity compensation gives you the ability to generate more value over time.

Since being paid a salary leaves no potential for a big payout in the future.  Sometimes the lure of a higher earning potential is enough to quantify taking on more risk with equity compensation. With the help of your financial advisor, you can determine which option is right for you.

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Eric C. Jansen, ChFC

Fun Facts About Me

When he is not researching the next great stock to add to client portfolios, you can find him travelling frequently with his family to Jackson Hole Wyoming.

  • Hometown: Chicago, IL
  • Birth Month & Year: November, 1964
  • Favorite Hobby: Goldmining in Nome, AK
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  • Can't be interrupted when: Watching the Discovery Channel
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  • Something on bucket list: Obtain Helicopter Pilot License
  • Family Pet: Goldfish

Steven C. Johnson, ChFC

Fun Facts About Me

Steve would tell you that one of the best parts of the day is spent talking to clients and relationships that result from it. When away from the office, he loves to travel the back roads of New England enjoying all the great sites that can be found off the beaten path.

  • Hometown: Townsend, MA
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Frederick M. Lane, ChFC, CASL

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  • Favorite Food: Italian
  • Can't be interrupted when: Listening to Pink Floyd
  • Hidden Talent: Landscaping
  • Something on bucket list: Space Flight - Tourism
  • Family Pet: None

Catherine Utley

Fun Facts About Me

  • Hometown: Huntington Beach, CA
  • Birth Month & Year: February 1977
  • Favorite Hobby: Anything that gets me outdoors exploring nature
  • Favorite Food: Anything Mexican
  • Can't be interrupted when: Drinking first cup of coffee for the day
  • Hidden Talent: Putting together complicated puzzles
  • Something on bucket list: Over the water bungalow in Fiji
  • Family Pet: Currently between pets. Previous owner of 2 adorable pugs

Catherine M. Gareri

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When not caring for her clients Cathy enjoys relaxing in her yard at home.

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  • Hidden Talent: Dog Whisperer
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  • Family Pet: In Between Mastiffs now so a little blue fish “Willy”

Katie E. Moore, CLTC

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  • Favorite Food: Mexican Food
  • Can't be interrupted when: I'm cooking
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  • Something on bucket list: See the Northern Lights and Potty Train my 2 year old
  • Family Pet: Caddy and Sierra – our two cats

Herbert Kyles

Fun Facts About Me

When Herbert isn't reviewing your portfolio or assisting you with your financial well-being you can probably find him relaxing with friends.

  • Hometown: Overland Park, KS
  • Birth Month & Year: November, 1989
  • Favorite Hobby: Hockey, Golf & Cooking
  • Favorite Food: Chipotle
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  • Hidden Talent: Fluent in French
  • Something on bucket list: Demolition Derby
  • Family Pet: None

Hesper Duval

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Anne Whitney

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  • Hidden Talent: Expert calligrapher
  • Something on bucket list: Go to San Diego Comic Con
  • Family Pet: Most recently, a rescued beagle named Max

Steve Taylor

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  • Favorite Food: Pizza
  • Can’t be interrupted when: Spending time with my family
  • Hidden Talent: Juggling
  • Something on bucket list: Play golf at Pebble Beach
  • Family Pet: none

Sarah Kupec

 

  • Hometown: Wyckoff, NJ
  • Birth Month & Year: November, 1992
  • Favorite Hobby: Hiking
  • Favorite Food: Chipotle
  • Can't be interrupted when: Watching LSU football. Geaux Tigers!
  • Hidden Talent: Chalkboard art
  • Something on bucket list: Travel to Germany
  • Family Pet: Max, a 14-year-old Westie

Cathy Hession

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When away from the office, Cathy enjoys working out and participating in the 26.2 mile Jimmy Fund Marathon Walk each September.

  • Hometown: Hanover, MA
  • Birth Month & Year: May, 1964
  • Favorite Hobby: Travel & hiking
  • Favorite Food: Danny's Homemade Sauce
  • Can't be interrupted when: Watching Katie ride
  • Hidden Talent: Equestrian photographer
  • Something on bucket list: Spend a month in Monterosso Al Mare w my family
  • Family Pet: Sassy, our Australian terrier

Kieran Lavery

  • Hometown: Bedford, NH
  • Birth Month & Year: November, 1989
  • Favorite Hobby: Playing tennis and softball
  • Favorite Food: Tex-Mex
  • Can't be interrupted when: Watching college basketball
  • Hidden Talent: Can solve a Rubik's cube in under 2 minutes
  • Something on bucket list: Attend Oktoberfest

Matthew Cleary

In his free time, Matt likes to hike, camp and travel with his wife Gina.

  • Hometown: Farmington, Maine
  • Birth Month & Year: March 1986
  • Favorite Hobby: Hiking
  • Favorite Food: Lasagna
  • Can't be interrupted when: Watching the Celtics
  • Hidden Talent: Water skiing
  • Something on bucket list: Traveling to Greece
  • Family Pet: Aspiring British Bulldog owner

Justin Giuliano

When not helping clients, Justin enjoys spending time with his wife and family while settling into his new home.

  • Hometown: Wethersfield, CT
  • Birth Month & Year: July 1988
  • Favorite Hobby: Exploring new destinations with my wife
  • Favorite Food: Frutti di Mare
  • Can’t be interrupted when: Grilling
  • Hidden Talent: A unique inability to sit still
  • Something on bucket list: Traveling to Europe

Rana Choubah

When Rana is not helping clients with their financial needs, she spends her time with her family traveling, hiking and running.

  • Hometown: Beirut, Lebanon
  • Birth Month & Year: October 1967
  • Favorite Hobby: Running
  • Favorite Food: Pizza
  • Can't be interrupted when: Reading a good book
  • Hidden Talent: Construction and home repair
  • Something on bucket list: Complete a triathlon
  • Family Pet: Two sweet cats, Macy and Maya

Krista Isabelle

In her free time, Krista can be found crafting or playing outdoors with her husband and son, curled up reading next to her beloved cat, "Berg", or cooking her favorite go-to meals.

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  • Favorite Food: Anything with peanut sauce
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  • Something on her Bucket List: Fostering animals

Danielle Drew

When Danielle does not have her head in a book studying to expanding her financial planning knowledge, she enjoys anything active and outdoors, including visits to the beach and hiking.  

  • Hometown: Dennis, MA
  • Birth Month & Year: November, 1985
  • Favorite Hobby: Working out, concerts, and exploring wineries
  • Favorite Food: Lobster pot pie, cheeseburgers, BBQ, the list goes on...
  • Can't be interrupted when: Working out 
  • Hidden Talent: Country line dancing
  • Something on bucket list: To hike the 48, 4000 footers of New Hampshire
  • Family Pet: none, hopefully a big dog someday

John "JP" Bisceglia

JP loves spending time with his niece and enjoys weekend trips to the cape during the summer.

  • Hometown: Shrewsbury, MA
  • Birth Month & Year: October 13th 1993
  • Favorite Hobby: Fishing with friends and family
  • Favorite Food: Pasta Alleluia
  • Can't be interrupted when: Hiking Wachusett Mountain with the pup
  • Hidden Talent: Navigating and driving boats
  • Something on bucket list: Helicopter snowboarding in Japan.
  • Family Pet: Alaskan companion noble dog

Jay Willwerth, ChFC

Fun Facts About Me

Jay’s days are spent helping clients achieve their financial goals, followed by nights and weekends typically watching his daughters play competitive volleyball.

  • Hometown: Melrose, MA
  • Birth Month & Year: September, 1959
  • Favorite Hobby: Golf
  • Favorite Food: Anything at a Patriot’s Tailgate
  • Can't be interrupted when: Watching the Patriot’s Game
  • Hidden Talent: Competitive Volleyball Watcher (Mostly his 2 daughters)
  • Something on bucket list: Play a round of Golf at Pebble Beach
  • Family Pet: Bella, our Shih-poo