In this post, we will talk about ‘Is it safe to get paid with Equity as an employee?‘ Previously we discussed WHAT DOES A NEGATIVE DEBT TO EQUITY RATIO MEAN FOR A COMPANY?
Equity also known as shares or stocks represents proportionate ownership in a company. It is a long-term source of finance to companies. Equity shareholders enjoy certain rights in the company but have a residual claim on company assets. In recent times, employees are sometimes offered equity settlements either as payments for the services rendered to the firm or as a reward for excellent performance or just basically a part of their remuneration package. In other words, they literally get paid with equity as a form of consideration. Settlements could either be stock/share options or just shares (equity). Stock options mean that equity can only be exercised by the employee at a future date and is subject to vesting conditions. Vesting conditions simply means the conditions required to be met by the employee before he/she can exercise stock options, for example, a condition that the employee remains an employee at the time the stock option will mature. Equity payment is recognized under the accounting standard “IFRS2 – share-based payment, ” and it is to be fully recognized in the financial statements.
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Is it really safe to get paid with equity as an employee?
Decisions we make daily have consequences, it may be good or bad and may have risks, that’s what makes a decision a choice made. Getting paid with equity as an employee has its own risks, and since nobody can determine the future, the decision rests with the employee. Equity remunerations are mostly granted by companies when they are cash strapped especially start-up companies that may not have enough cash, to encourage the long-term commitment of employees, when companies want to conserve cash, etc.
There are certain things to consider about getting paid with equity:
There is no guaranteed gain
Remember that equity remuneration is not cash, different variables affect the value of equity stake such as the performance of the company – will it be successful or will it fail? Share prices, etc. It is, therefore, no guaranteed gain on equity appreciation for the employee.
Equity compensation structure
Different companies have their different equity remuneration structures with consequences; it may be tax consequences or a lapse in predictions, whatever the case, employees should scrutinize the compensation and decide if it’s favorable or not.
Some equity remunerations especially stock options often require that the employee remains in the firm for a certain period of time, this tends to tie the employee down because of the anticipated future gains. Nonetheless, the employee should also consider that, the company may run out of business before the end of the vesting period or that the employee might lose his / her job before time to enjoy getting paid with equity.
There is a risk of heavy tax consequences to employees if stock options are not exercised at the right time.
Huge payout potential
With equity remuneration, a successful company performance would mean that the employees would enjoy a very big payout and even become rich.
Equity is a safe remuneration option, but it has its risks. Employees should think carefully before deciding whether or not to get paid with equity.