Salary vs. Capital: Why equity is so important for startup employees

Ekwity
Ekwity
Jul 9, 2019 · 4 min read

Working in a startup obviously has its pros and cons. The most important components of your pay package as an employee are salary and equity. If you are working or want to work in a startup, you should understand both.

Design by Sophie Louise Hurley Walker

Some people are attracted by the startup life because they want to work in an innovative environment and/or because of the project itself and the mission of the company. In any case, they want to have a bigger impact than in a traditional company.

In Europe, especially in less mature ecosystems, the idea of working in a startup is also associated with common stereotypes like having a ping-pong table at the office, no dress code, no hierarchy… But such myths–even if they are not completely wrong–should be balanced with a practical understanding. To give you a brief overview: working in a startup is pretty risky, you need to be flexible, and you need to work super hard. The reward is that you’ll get some benefits that you won’t have in traditional companies. Here, we’ll consider the financial aspects.

A startup is a young company that is looking for a scalable and profitable business model. Without steady revenues, most startups cannot pay employees as much as traditional companies would. But since they have high growth potential, owning a piece of the company could be worth millions in the coming years (or nothing–never forget the risk/likelihood of the outcome being zero).

But the very real potential is why most startups give equity to their employees on top of their salary. That way, they can compete with big companies to attract and engage talent.

As an employee, getting equity can also be a great deal, but you must understand the differences with your salary.

Equity cannot replace salary.

Salary is simple, reliable and recurrent: You get paid in cash every month–hopefully. That is quite convenient, since after all you need to pay your rent and your groceries. Equity (stock options, BSPCE, free shares, RSU, EMIs…) can’t pay for those things.

Here are the main differences between salary and equity:

  • Pretty simple and concrete vs. super complex and virtual: You receive your salary in your bank account every month. Equity is granted through complex legal instruments (stock options, BSPCE, free shares, RSU, EMIs…) with documents that you sign but probably don’t understand.
  • Short-term vs. long-term: Salary is worth its exact value as soon as you get it. Equity only has its value set by the market (private or public) and is worth something only if the business grows, which does not happen overnight.
  • Certain vs. uncertain: Once granted, salary is yours and has a fixed value. Equity is riskier since the value depends on the results of your company. Keep in mind that equity is never guaranteed to make a profit until you sell your shares (which are not your options!).
  • Liquid vs. illiquid: For private companies–i.e., most startups–it is only possible to sell the shares of the company if you have someone else who is keen to buy them. This is typically when the company is sold or goes public via an IPO, and less commonly via a secondary sale.

That is why in most countries the law requires that every employee always gets a salary. And even if most founders are unpaid for the first months of their venture, they always end up getting a salary when the company raises funds. Nobody can rely on equity to pay their bills!

But equity can be a game changer!

Even with a high salary, it will take years or decades to become rich from those monthly payments. That is why equity is worth the risk: having 0.6% of a company valued at 1 billion is not at all impossible in the startup world!(Check out this article to see a real employee’s story)

That’s why every startup employee should have some part of the value they’re creating.

www.ekwity.co

Ekwity’s mission is to help entrepreneurs to share the value with their team. Our goal is to save entrepreneurs’ time and hassle while providing the best assistance in designing and implementing a tailor-made employee stock options program (ESOP).

We provide:

  • Comprehensive knowledge base of benchmarks/best practices in employee equity throughout Europe
  • Advisory services with the best experts to set up a company’s employee option program based on their specific business needs
  • Training on employee equity from general introduction to the creation of specific communication material for your in-house teams

Interested in our services? Contact us now!

Ekwity

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