How can you explain equity compensation to candidates unfamiliar with the concept?

As companies grow and raise more capital, your percentage ownership may decrease. Understanding dilution and its implications on the value of your equity is important, especially in start-ups or rapidly growing companies.

When explaining equity compensation to those unfamiliar with it, I start by defining equity as a form of company ownership given to employees. This can be in stock options, restricted stock units, or shares. I emphasize that equity is a stake in the company's future, aligning employees' interests with the company's growth and success. It's not just a salary component but an investment in the company. I also make it clear that while equity offers potential financial gains if the company succeeds, its value can fluctuate based on the company's performance. Understanding equity is crucial for candidates, as it represents both a potential reward and a commitment to the company's long-term vision.

It's a double-edged sword when it comes to equity. As much as a company's intention is to align its interest to be in sync with employees, the risk is that when it comes to unethical practices such as inflating one's revenue just to show that the company is doing relatively well, it will have an indirect effect on the share price whereby the foundations of a company may seem to be solid when it's actually not. However, it is also a great tool in retaining the employees' loyalty when one is to factor in that an employee may have to stay for 3 years (example) to be able to earn the shares in full.

Equity compensation is like owning a piece of the company. It's a long-term incentive tied to the company's success. You'll need to stay for a vesting period to fully own it. There are various types, each with its rules. Seek advice to understand your grant. It can offer substantial rewards in the future if you believe in the company's growth.

Equity is a misleading term. I don’t judge everybody at the same level, but it is certainly not based on race. I hire the best person for the job, and I have had very diverse departments over my career because of that. Less effort same result is not an option. I believe in equality. You earn it you get it regardless of circumstance. You don’t get to play the victim and get the same result when your life path is the result of your own decisions .

Highlight the significance of liquidity events, such as an IPO (Initial Public Offering) or acquisition, on your equity. These events often provide the first opportunity to sell shares at a potentially substantial profit.

Educating your team on equity offers involves comprehensive orientation, visual aids, individual consultations, FAQs, workshops, regular updates, resource access, feedback mechanisms, case studies, and legal expertise to empower them with equity knowledge.

Provide historical growth examples of companies similar to yours in terms of size, industry, or development stage. This can help candidates visualize the potential growth trajectory and future value of the equity.

You can present the equity offer through a formal document outlining the terms, a clear explanation of the benefits, visual presentations, simulations of potential growth, one-on-one meetings to address questions, and interactive workshops or webinars to ensure a comprehensive understanding of the opportunity.

So much ignored. Roles of equity owner, employee and director are all at odds with the others. Sell the warm and fuzzy, and you will likely get cold and scratchy in the trade. Employees should try to get every penny they can for themselves out of a company as quickly as possible, because a tomorrow is not guaranteed. Equity owners should try to collect dividends quickly, because tomorrow is not guaranteed. Directors should try to keep all the money inside the company, because their job is to look after the company, and tomorrow is not guaranteed. Balancing shareholders and their dividends and the salary costs of required employees with necessary costs of reinvestment is challenging. Sell the truth and the consequences of equity.