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Time to Read: 6 minutes
Not only does Stratos Private Wealth share our San Diego home with some innovative companies including Qualcomm, Illumina, ViaSat, but we continue to see an expansion of start-ups and tech companies popping up around the county. And while an up-and-coming tech company typically requires the expertise of programmers, marketers, developers and more highly talented, qualified individuals, it can’t always afford the five- or six-figure salaries these employees have come to expect. In many cases, these start-ups will turn to a different option for employees: equity compensation. Below we’re outlining what equity compensation is and how it compares to its more traditionally used counterpart salary compensation.
What Is Equity Compensation?
Equity compensation is compensation for employees in the form of a share of the company’s future profits. This could be through various stock options and/or performance shares, or whatever other arrangements the individual company has decided on.
Tech companies, especially when they’re just starting out, may not have the cash flow needed to cover the salaries of their employees. But, of course, they recognize the need for incentivizing and encouraging motivated individuals to join their team. That’s why some tech companies turn to equity compensation. Typically, this will be offered either in conjunction with a below-market salary offer, or no salary at all.
Pros of Equity Compensation
Being offered a portion of your company’s future profits is an exciting opportunity for workers and an important incentive for loyal employees to stick with one company for many years. Dependent on the success of the company, there’s an opportunity for these stock options to possibly provide a bigger payout than a standard salary would.
Risks of Equity Compensation
But as is with any stock option, where there’s a chance for reward, there’s a risk as well. Compensation via stocks or other equity compensation could leave employees’ pay at the mercy of the market and the company’s performance. And while this is a risk that many understood when agreeing to the terms of their compensation, it can be hard to remember nothing is guaranteed.
In fact, it’s not entirely uncommon for tech industry employees to experience lifestyle creep, which is a rise in spending or standard of living paralleled with a rise in income, only to feel the crash hardest when their stock options perform poorly.
Additionally, it’s important for employees to understand the potential tax implications that equity compensation may have on their future earnings. These implications will vary dependent on the structure and specifics of the company offering the compensation. But in some cases, cashing out on your stock options may look like a big payout on paper, but taxes could be taking a sizeable chunk out of the check you were expecting to receive.
What Is Salary Compensation?
More commonly used throughout the rest of the workforce, salary compensation refers to the base pay one receives based on a predetermined hourly, weekly, monthly or yearly figure. With most salaries, you know exactly how much you are receiving and the number does not fluctuate based on the profits or losses of the company.
Pros of Salary Compensation
In a word: dependable. Every pay period, you know exactly how much you’re going to receive. This makes salary compensation a steady, dependable form of payment that allows you to plan ahead for future spending, saving, etc. because you know how much you can count on receiving on a regular basis.
Risks of Salary Compensation
While dependability is an obvious advantage of salary compensation, it can be considered a disadvantage as well. Why? Because with a salary, there’s few chances for a greater payout than what you’re already earning beyond promotions, bonuses or additional salary increases. In addition, pay grades and salary structures can mean you’re capped out at earning a certain amount. And, of course, with equity compensation, there is still the risk of job layoffs or a company going under.
Joining the tech industry can be an exciting opportunity for talented, dedicated individuals across the country. But as you navigate your compensation options, it’s important to remember both the risks and rewards of equity and salary compensation.
This content is developed from sources believed to be providing accurate information, and provided by Stratos Private Wealth It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Information presented on this site is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any product or security. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites.
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Next Steps
If you want to take the next steps to see how we can help you successfully translate your options and stock exposure into the fuel for living the life that you want, here’s what’s next. At the end of this video, we’ll direct you to a one-minute questionnaire about your financial circumstances and a link to our live calendar, where you can book a 15 minute virtual meeting with one of our lead advisors. On that call, one, cover your top priorities. How our team might be able to help and we’ll try to answer any questions you might have about how to approach your company stock strategy. If our services are the right fit for you, we’ll block off additional time to draft and provide a free written guide book that will give you valuable insight into three key areas. One, how much risk and exposure do you currently have in your portfolio now? Number two, is your company stock and full financial plan on track to fuel the life that you and your loved ones want to live? In other words, does it allow you to retire when you want, spend time with family or traveling, send your kids to school, etc. And finally, number three, do your current strategies align well with your intentions? Thank you very much for taking the time to watch. We hope you found this valuable and look forward to talking with you soon.
Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Private Wealth is a division through which Stratos Wealth Partners, Ltd. markets wealth management services. Investment advisory services offered through Stratos Wealth Partners, Ltd., a registered investment adviser. Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Investing involves risk including possible loss of principal. Some of the information contained herein has been obtained from third party sources which are reasonably believed to be reliable, but we cannot guarantee its accuracy or completeness. The information should not be regarded as a complete analysis of the subjects discussed.