It has become common practice in the tech industry, both at startups and large companies, to grant some form of equity to employees. And compared to cash, equity may much better align the interests of employees with the long-term interests of the company—or at least that is its intention. For earlier-stage employees, equity is a much riskier form of compensation because of the wide variance in eventual value—an employee’s shares in the company (not to mention those of the founders and investors) could end up being worth nothing, or hundreds of millions of dollars or more. Equity compensation is a notoriously complex subject. (For a deep, practical dive into the complexities of equity compensation, see The Holloway Guide to Equity Compensation.)
Candidates can have very different needs and preferences when it comes to cash and equity. Cash has a guaranteed value (setting aside changes like inflation), while equity can end up being worth a lot more or less than anyone’s best guess. Cash is a commodity; equity in a company is not.
A candidate’s response to equity vs. cash may stem from their risk preference. But often, it comes down to practical necessities. Founders may feel that a candidate unwilling to sacrifice cash for equity doesn’t believe in the company, when in fact, differing financial and familial situations may determine candidate response. For example, a candidate who has a family to provide for, or obligations like student debt to repay or mortgages to maintain, may be unable to sacrifice a guaranteed salary, even if they are passionate about your company’s mission. Companies do well to foster sensitivity to this reality in their candidate pool.
Ideally, the candidate’s position on cash vs. equity will align with what your company can offer. A candidate that really needs more take-home pay might not be a good fit for an early-stage startup that can only afford to offer—or prefers to offer—partial ownership in the company instead. If you have flexibility, one technique you can use is to offer candidates the ability to “trade cash and equity” by letting them choose between a low equity/high cash or high equity/low cash offer, depending on their cash needs and risk appetite. Matt Mochary’s book, The Great CEO Within, recommends offering the amount of cash a candidate would need to live comfortably, finding what an all-cash offer might look like at a large company, and then bridging the difference in equity.
FAQs
Cash has a guaranteed value (setting aside changes like inflation), while equity can end up being worth a lot more or less than anyone's best guess. Cash is a commodity; equity in a company is not. A candidate's response to equity vs. cash may stem from their risk preference.
Which is better, equity or cash? ›
In any given period, equities could underperform cash, but if your return requirement is more than cash can deliver, holding cash will guarantee that it falls short of this objective. With historically low-interest rates, investors need higher-risk strategies to achieve that required return.
What is the difference between cash and equity compensation? ›
Equity may have a bigger payoff one day — but in the short term it's more risky. What are your priorities when it comes to how you're going to use your compensation? Equity can't pay your mortgage, but cash can!
What is equity instead of salary? ›
Equity compensation is non-cash pay that is offered to employees. Equity compensation may include options, restricted stock, and performance shares; all of these investment vehicles represent ownership in the firm for a company's employees.
Is it better to use cash or equity? ›
As a general rule, buyers prefer to pay with equity when they think their shares are overvalued. And sellers prefer to receive equity when they're confident that the asset in question will create value for the buyer, since the seller will have a stake in the buyer after the sale.
Is cash flow or equity more important? ›
The most important thing a buy and hold investor should look for is built-in equity. The second is cash flow. There are other things too, of course, such as potential appreciation, neighborhood stability and safety, hassle, etc. But in real estate, first comes equity.
What is the difference between equity and cash equity? ›
What Is the Difference Between Cash and Equity? The difference between cash and equity is that cash is a currency that can be used immediately for transactions. That could be buying real estate, stocks, a car, groceries, etc. Equity is the cash value for an asset but is currently not in a currency state.
What is the difference between cash and equities? ›
Cash versus shares – how have they fared over the long term? Your money might not be at risk as cash, but it also never grows. Cash just doesn't pay over the long term. Even in a stock market slump, it's usually better to ride the market through the downturn and hopefully up an eventual rally.
What does cash to equity mean? ›
A measure of equity cash usage, free cash flow to equity calculates how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid. Free cash flow to equity is composed of net income, capital expenditures, working capital, and debt.
What is equity compensation for tech employees? ›
Equity compensation is typically offered to employees alongside a lower than market average salary. The idea is that if the company succeeds, the employees stand to make money from their shares while taking a lower salary upfront.
If cash is more important, asking for a higher salary first is better than an equivalent bonus because it's recurring, compounding and taxed more favorably. If equity is more important, you'll need to clarify if you're getting stock options (ISO, NSO) or RSUs (single-trigger, double-trigger).
What is the average salary for equity? ›
The estimated total pay for a Equity Research Analyst is £90,555 per year, with an average salary of £69,828 per year. This number represents the median, which is the midpoint of the ranges from our proprietary Total Pay Estimate model and based on salaries collected from our users.
Is it better to have cash or shares? ›
Shares provide ongoing dividend income plus valuable capital growth. On the other hand, put your money in cash and your money will only earn interest – typically at a low rate. As we've seen in recent years, shares can swing in value over short periods, sometimes dramatically.
Is it worth using equity? ›
Accessing equity in your home is a great strategy to buy another property or renovating. One of the popular ways to access your home equity is to refinance. How much equity you can use will vary between lenders.
What percent of your portfolio should be in cash? ›
A general rule of thumb is that cash or cash equivalents should range from 2% to 10% of your portfolio, although the right answer for you will depend on your individual circ*mstances.
Should I take cash or stock options? ›
Immediate vs. Long-Term Rewards: Cash compensation offers immediate financial rewards, providing stability and liquidity. In contrast, stock options typically require a longer-term commitment, which may take years to vest and realize their full value.
