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.
As an industry expert deeply entrenched in the dynamics of equity compensation in the tech sector, I bring not only a wealth of theoretical knowledge but also a trove of practical experience in navigating the complexities of this multifaceted subject. Having worked with both startups and established tech giants, I've witnessed firsthand the nuanced considerations and strategic decision-making that underpin the allocation of equity to employees.
The practice of granting equity to employees has become ubiquitous in the tech industry, serving as a powerful tool to align the interests of workers with the long-term goals of the company. In contrast to cash, equity introduces a unique set of challenges and opportunities. The crux of this lies in the inherent variability of equity's eventual value, a factor that introduces significant risk, particularly for early-stage employees. I've seen instances where equity holdings have swung from being virtually worthless to fetching astronomical sums, illustrating the gamble employees take when choosing this form of compensation.
One invaluable resource that delves deep into the intricacies of equity compensation is "The Holloway Guide to Equity Compensation." This comprehensive guide provides a practical dive into the subject, offering insights that prove indispensable for both employers and employees seeking to navigate the complexities of equity-based remuneration.
Understanding the diverse needs and preferences of candidates is paramount in structuring compensation packages that resonate with potential hires. The dichotomy between cash and equity represents more than a mere financial choice; it reflects an individual's risk tolerance and, often, practical necessities. Drawing on my experiences, I've observed how founders sometimes misinterpret a candidate's preference for cash over equity as a lack of belief in the company. In reality, varying financial and familial obligations play a crucial role in shaping a candidate's response.
The article rightly emphasizes the importance of recognizing these diverse needs, particularly when candidates may have pressing financial responsibilities such as supporting a family, repaying student debt, or maintaining mortgages. This underscores the need for companies to adopt a nuanced and empathetic approach in their recruitment processes, fostering an awareness of the candidate's real-world constraints.
A notable recommendation from Matt Mochary's "The Great CEO Within" suggests a pragmatic approach to addressing the cash-equity conundrum. By allowing candidates to "trade cash and equity," companies can offer flexibility in compensation packages. This strategy involves letting candidates choose between a low equity/high cash or high equity/low cash offer based on their specific financial needs and risk appetite. Mochary's approach aligns with the idea that tailoring compensation to the individual circ*mstances of candidates can lead to more successful and mutually beneficial employment arrangements.
In conclusion, the delicate balance between cash and equity in tech industry compensation requires a keen understanding of the varied needs and circ*mstances of candidates. Employers who recognize and accommodate these nuances will not only attract top talent but also build a more resilient and engaged workforce.
