Equity or Company Stock
Equity means you own part of the business, usually stock in the company. Usually employees get offers on common stock, but there are many types of stock (preferred, common, non-voting, etc). Please seek professional advice if you’d like to learn more.
If you are getting a job at a startup, you may get offered any of the following:
- Stock Options
- An Equity Position
- Stock Grants
- Employee Stock Purchase Plan
These are similar in that you are being given an ability to own company stock - you own a part of the business. It’ll be a small part of the business, but it’s a part of the business. Stock is sold as “shares” and you’ll own a certain number of shares of the company. The portion of the company you own, is the number of shares you own divided by the number of shares outstanding (i.e total shares held by all owners).
Stock Options
Stock options can be offered to you when you start working at a small company as a form of long term compensation. The option itself is a legal document that give you the option to purchase some kind of stock in the company for a today’s price in a future date.
Stock options usually are earned over a fixed “vesting period,” meaning that every year or so, you “earn” the right to keep these stock options. For example, you may be given stock options of 1000 shares that “vest” over 5 years at $5 per share. The vesting periods are yearly, meaning you earn the right to keep 200 shares worth of your option every year. If you leave the company before your second anniversary of working for the company, you only get to keep 200 shares worth of option. If you stay for 3 years and a month, you would keep 600 shares worth of option.
Stock options are only worth anything to you if your company “goes public with an IPO” or the stock price rises from the option strike price. If the business ceases operation, the stock price stays stead or reduces in price, or your options expire, the stock option is worthless
More
Stock options are a form of compensation that can be offered to employees of a company, including those that are not publicly traded. When an employee is granted stock options, they have the right to purchase a certain number of shares of the company’s stock at a fixed price (called the exercise price or strike price) at a future date.
There are several potential benefits of stock options to a prospective employee:
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Potential for financial gain: If the company’s stock increases in value over time, the employee can exercise their options to purchase the stock at the lower exercise price and then sell it at the higher market price, resulting in a profit.
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Alignment of interests: When an employee holds stock options, they have a vested interest in the company’s success. As the value of the company increases, the value of their stock options also increases, which creates an alignment of interests between the employee and the company.
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Potential for long-term rewards: Stock options are often granted with a vesting schedule, meaning that the employee has to work for the company for a certain period of time before they can exercise their options. This encourages employees to stay with the company for the long term and rewards them for their loyalty and dedication.
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Potential for Equity Participation: Stock options can also allow a non-founder or non-capital provider employee to participate in the equity of the company, which would be beneficial for them in terms of long-term wealth creation.
It’s worth noting that stock options can also come with risks. The value of the options may never reach the point where it’s worthwhile for the employee to exercise them and the company’s stock may decrease in value. The options can also be subject to expiration and other restrictions if the company is not publicly traded.
Advanced Details About Stock
In terms of public corporations, Common Stock and Preferred Stock represent ownership in a public corporation and have different rights, features and characteristics.
Common Stock: Common stock represents ownership in a public corporation and entitles the holder to vote at shareholder meetings and to receive dividends, if any, that the company declares. Holders of common stock also share in the company’s profits or losses.
Preferred Stock: Preferred stock represents ownership in a public corporation but unlike common stock, it is not entitled to vote at shareholder meetings and dividends are paid at a fixed rate before dividends are paid to common shareholders. Preferred shareholders also have priority over common shareholders in the event of liquidation.
Each company may change the rights of preferred stock, so please consult a financial professional for details.