Weighing a Higher Salary Versus Company Equity

There may be a time in your career when you have the opportunity to shift gears—to take a leap and work in an entirely different environment.

It’s an exciting prospect, but transitioning from your current role to a new one in a large company—or, even more of a dilemma, a quickly growing startup—is a tough decision to make. Do you negotiate for the higher salary and long-term viability of working for a public company, or do you take on some risk at a lower salary at a startup with a potential massive upside: padding compensation with stock options that could one day be worth a lot more?

Whether you’re fresh out of grad school and deciding which path to take, or you’re established in your career and trying to determine your next step, this is a big question. Let’s look closer at some of the factors that might help you determine which is better for you.

The Lure of Future Riches

Let’s assume, for the sake of argument, that the job role is the same and the work environment is comparable. In reality, working in a fast-paced startup is very different from a large, established company with substantial teams supporting your work. If that matters to you, then the question of compensation and company type may not matter—people with young children, for example, may struggle to maintain the work–life imbalance that a young startup creates.

But, assuming all other things are equal (and that hours aren’t a factor in your decision-making), compensation comes down to one of two things: the sure thing and the potential windfall. Startups have limited funds—and a lot they need to do with them. They rarely compete with big companies on salary. What they can offer is a nimble, more flexible work environment and equity in the company, or options to invest if the company goes public in the future.

Those options are a gamble: Only 10% of venture-backed startups go public or are acquired by a larger company. If you stay on at a company for four to six years to realize your stock options, but that company never goes public—or, worse, folds—you lose out.

And even if the company does go public, and its value remains consistent, that doesn’t mean the stock will be worth significantly more than the strike price of your options. Imagine working for five years to realize your stock options only to find that they are worth $1 more than your strike price: It’s a tidy bonus but doesn’t make up for half a decade of lower salary.

So Salary Is Better?

It really depends on your financial needs, and the company whose offer you are considering. If a publicly traded company offers you equity as part of your compensation package, you know exactly what that is worth. It’s the same as a traded-option package. But for a smaller, private company—even an established company with multiple rounds of venture capital backing—it’s hard to know exactly what the company is really worth.

Private companies are by nature secretive about their internal valuation and the price they’re targeting for preferred stock sold to outside investors. And in most cases, if you leave a company before the Initial Public Offering (IPO), the potential profits disappear. Some companies legitimately offer equity as a compensation practice, while others use the lure of future riches to keep their HR expenses down.

Things to Keep in Mind

If you are offered stock options or company equity as part of your compensation package, potentially reducing your cash compensation, keep the following in mind:

  • Vesting time: Most options vest after four years. You’re committing to a job for four years if those options are truly part of your compensation calculation.
  • Options expire: Some companies never go public, and those options will eventually die off. There are plenty of large, profitable companies that have remained private to date despite demand for an IPO.
  • Preferential shares: Outside investors frequently have preferred terms to ensure they get paid out first in the event of an IPO or acquisition.
  • Number of shares: If you are being offered 20,000 shares, what about your colleagues? Too many options offered to a quickly growing team can dilute their value quickly.

That’s not to say that accepting equity in the form of stock options is a bad move, but it’s something to research and evaluate carefully. If immediate compensation is important for you, or if the long-term risk of those options not vesting, not holding value, or otherwise not paying out is too much, a more traditional job may be a better choice.

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