People have their pick of employers for a variety of reasons. The modern workplace perk might be anything from a casual dress policy to unrestricted vacation time to the option to work from home. When it comes to attracting and keeping talented workers, however, one perk stands head and shoulders above the rest: equity.
Having equity in a firm means you have some say in the operations and profitability of that company. Thousands of workers at companies including Pinterest, Slack, Lyft, and became overnight shareholders in 2019 thanks to initial public offerings (IPOs). There will be a slew of initial public offerings (IPOs) in 2020, and many employees are wondering how likely it is that their stock options and restricted stock units (RSUs) will yield lucrative dividends.
Consider your equity and possible gain before you go island hopping in the Caribbean.
It's about the corporation
Many other kinds of equity packages exist, including signing incentives, annual bonuses, and promotions. You should think about the potential future value of any equity you are offered as part of a compensation package when weighing the benefits of joining or remaining with a company. You can do this by acting like an investor and weighing the company's growth prospects before committing time and energy to it, keeping in mind that your equity will only be worth anything if your business succeeds.
Calculating Your Share of the Company
A liquidity activity, such as an acquisition or initial public offering (IPO), is the most common source of return on equity. Finally, your return on equity will be determined by the value created by one of these exit strategies. The dollar worth of your equity is equal to the percentage of the company's total value that you own. Consider this in terms of the formula A x B = C, where A is your percentage of ownership and B is the market worth of the company (C).
However, it may not always be a simple calculation due to factors such as liquidation preferences (which affect who gets paid first and at what rate). The amount of ownership you have in a company is calculated by dividing the number of shares you hold (or have the option to buy) by the total number of fully diluted shares outstanding. You can obtain this information in your offer letter or the company's equity management platform, such as Carta.
Diluting and vesting
One of the most important factors in establishing your level of ownership is the number of shares you now possess or are eligible to acquire. The two most important factors here are vesting and dilution. Options and RSUs often have a vesting period of four to six years, during which time the holder cannot exercise the option (or pay to convert the option into stock). This becomes relevant if you want to quit your job before your stock options have fully vested. Options may become vested earlier than the standard four-year minimum or become fully vested in the event of an acquisition, but many corporations have accelerated vesting or early exercise options. Your option grant specifications will specify the vesting timetable and terms.
Intel has begun laying off employees in the technology sector.
Your equity worth will decrease because of dilution, which causes your share of ownership to decrease (think back to the equity equation). In the early stages of a company's development, it is common for many rounds of financing to be raised, each of which dilutes the value of your investment. The same thing occurs when more RSUs or stock options are given to workers.
Dilution isn't necessarily a bad thing, so relax. Each each round of funding adds value to an early-stage company's operations. Your stake in the company could increase in proportion to the growth in its market value. Therefore, it is important to include in the prospective development and value of your firm in determining what your equity may be worth, especially at the time of an acquisition or IPO.
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