The Open Guide to Equity Compensation

Summary

The Open Guide to Equity Compensation ❇️ This guide is now published on Holloway. Read it there for search, booksmarks/highlights, expert commentary, and PDF/EPUB download. Introduction Equity compensation is the practice of granting partial ownership in a company in exchange for work. In its ideal form, equity compensation aligns the interests of individual employees with the goals of the company they work for, which can yield dramatic results in team building, innovation, and longevity of employment. Each of these contributes to the creation of value—for a company, for its users and customers, and for the individuals who work to make it a success. The ways equity can be granted as compensation—including restricted stock, stock options, and restricted stock units—are notoriously complex. Equity compensation involves confounding terminology, legal obscurities, and many high-stakes decisions for those who give and receive it. If you talk to enough employees and hiring managers, you’ll hear stories of how they or their colleagues met with the painful consequences of not learning enough up front. Though many people learn the basic ideas from personal experience or from colleagues or helpful friends who have been through it before, the intricacies of equity compensation are best understood by tax attorneys, corporate lawyers, and other professionals. Decisions related to negotiating an offer and exercising stock options, in particular, can have major financial consequences. Because the value of employee equity is determined by the fate of the company, an employee’s equity may be illiquid for a long time or ultimately worth nothing, while taxes and the costs of exercise, if they apply, may not be recouped. Even when a company is doing well, an employee may suffer catastrophic tax pitfalls because they didn’t anticipate the tax consequences of their decisions. Understanding the technicalities of equity compensation does not guarantee that fortune will smile upon you as wa...