How does equity even work?

December 30, 2011 8:34 AM

How to bring up the question of getting my hands on some equity in the company I work for? I work at a small (>10 employees) engineering firm contributing greatly to the intellectual property in which we trade. I get paid decently (for which I am definitely grateful) but there's never been any discussion of earning any equity...

The company isn't a start-up per se, as we've been around for 10 years or so, I've been involved for almost 2. But I feel like we're very start-up-ish. We consistently win contracts and produce and sell small quantities of high-tech gizmos, and we're getting close to having products that we should be able to sell in much higher quantities. My boss and the people we work with are always very demanding and eager for things to get working as they seem to all stand to get a lot of money if we're successful. I, however seem to have job security as my main motivator (again, I'm very glad to have this job at all.) I find myself having to work long hours on short notice and take up all sorts of strange responsibilities. I think if I had more of a stake, I'd be a lot less bitter, and a lot more willing to be flexible and take on extra responsibilities, etc. This part is easy for me to explain, but what would I be asking for? I'm pretty sure we're just privately owned, so there are no formal stocks that I've ever heard of... I have little to no insight into the finances and no idea how something like what I'm asking for would be implemented. Anyone have advice to offer? Throwaway email if you feel compelled to ask for details: [e-mail]

posted by anonymous to work & money (9 answers total)

Profit-sharing? If you're going to approach your boss about some sort of profit sharing plan, you need to present a well-researched, comprehensive plan. Just making vague noises about equity doesn't sound serious.

Of course, if the place doesn't generate much in the way of profits, your share could be pennies. Maybe you should just negotiate more money, more time off, or some other form of compensation (but be aware you'll pay taxes on stuff like training or educational benefits.)
posted by Ideefixe at 8:53 AM on December 30, 2011

I hear about your sort of situation a fair bit - mostly as an answer to the question "why did you decide to leave company X and start your own company?" I understand if that is not the course you want to take, but it sounds like you may be able to since your contributions to your current company are significant. Of course the concept of "job security" isn't really what it once was and some think that "job agility" is the way to make it.
posted by zomg at 9:14 AM on December 30, 2011

Why do you want equity? It really only becomes compensation if the company gets sold and your stake gets converted to cash or some other stock that you can sell, etc. I've had equity and or stock options a few times. It's over rated. Unless there is a business plan that is working towards a near term IPO or acquisition opportunity, any significant equity can become more of a anchor than anything else.

I don't think paper equity that has no tangible value will have the effect on you that you think it will. You still be working harder, and you'll quickly realize that you haven't really gotten anything additional for it. In your situation, I might try to negotiate a bonus structure tied to sales of the products you've been so critical to developing.
posted by COD at 9:27 AM on December 30, 2011 [8 favorites]

You don't want equity in a small, privately held company it's incredibly hard to convert to cash and for the owners it becomes a nightmare to manage. I'd look into profit sharing or a bonus structure for the short term.
posted by bitdamaged at 9:50 AM on December 30, 2011 [2 favorites]

I agree with COD. Equity is only valuable if you can sell it. Certainly you *can* sell equity in a privately-help company, but it might be hard to find a buyer or agree on a price. Unless the company goes public or is sold, then it's hard to cash out your equity. Also, if the company's 10 years old and and has less than 10 employees, how likely is the equity to be valuable? Generally the appeal of getting equity at a startup is that, as the company grows, so will its value, and the equity you got (which is fractional ownership of the company) early will be worth a lot more later. If the company isn't growing, this isn't the case.

again, I'm very glad to have this job at all.
Don't be. Look around. Talk to recruiters. Go to interviews. Don't skip out on what might be great opportunities for no other reason that you're comfortable where you are, or because other people in the world have it worse than you do. Maybe you'd feel more fulfilled in a rea start-up with potential for growth, or at an established public company where you get part of your compensation in RSUs that you can convert to common stock.
posted by tylerkaraszewski at 9:53 AM on December 30, 2011 [1 favorite]

Agree with others on how useless it can be to take a stake in a private company.

If you are not satisfied with your current job, then start looking for other opportunities immediately. Maybe you find something awesome! Or maybe you can get the leverage you need to negotiate a better situation at your current gig.

Your use of the word 'bitter' suggests to me that you might be better off shooting for the former.
posted by Sauce Trough at 10:48 AM on December 30, 2011

Equity -- in the form of ESOPs or whatever -- is essentially a form of deferred compensation. It's usually offered in place of a raise or bonus or cash contribution to a retirement plan.

In the startup phase, it's often a way to keep people on while cash flow is tight, giving them hope that they'll be able to cash in later -- but usually that means a company on the IPO path.

Note that companies that need to bring in VC to ramp up production are almost always doing so in a way that dilutes the stake of any earlier equity-holders, no matter how they got it.

Just some points to help you think about this; I haven't been through this exact scenario myself.
posted by dhartung at 11:53 AM on December 30, 2011 [1 favorite]

As others have said equity in a 10 year old private company is pretty worthless in the sense that it's just about impossible to turn into cash. Basically the company would have to be sold (for cash) in order for you to get anything, how likely is that?. There are other complications as well that may make it difficult to give employees equity - first and foremost the structure of the company (C corp, LLC, whatever).
posted by Long Way To Go at 2:35 PM on December 31, 2011

I have a 24% equity share in a ~10yo company - I brought the IP, 2 others brought startup cash and marketing. As far as I'm concerned, that 24% stake has a value of $0.00 today. Unless you expect the business to either be sold or be highly profitable (and pay dividends to the owners) in the immediate future then equity is not what you want.
posted by russm at 7:03 PM on January 1, 2012