How Do I Equate An All Cash (Consulting/Banking) vs. Cash & Equity (Tech Job Offer)?
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When you’re offered a job, you may get an all-cash or cash + equity offer. The cash + equity may sound stingy because you’ll get less cash, but the equity may be worth it in the right circumstances.
So how do you tell which is right for you? Read on to learn the difference between the two and how to decide.
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What Is an All-Cash Salary Offer?
Cash compensation is an all-cash salary. The money you are offered to do the job will be paid in cash. You don’t have to buy stocks, exercise options, or wait for your compensation until you’re vested.
For example, if you’re offered an all-cash salary, you may get an offer for $150,000/year or a cash + equity offer of $100,000/year + $50,000 in equity compensation.
The all-cash offer sounds better off the bat because it’s a higher salary, but there are other factors to consider.
Pros and Cons of an All-Cash Salary Offer
Like any offer, there are pros and cons to an all-cash salary offer. Understanding the good and bad can help you choose the right option for you.
You Know What You’re Getting
With a salary, you know how much you’ll earn and when. As a result, it’s easier to budget, save, and plan for the future. Of course, there’s always the risk you’ll lose your job, or the company will go under, but there’s less risk with an all-cash offer.
You Receive Your Money as You Earn It
When you accept an all-cash offer, you receive your money in regular intervals, whether bi-weekly or monthly. You don’t have to wait to be vested or for the stock prices to go low enough to exercise any options. You’ll get your full compensation as agreed within the year.
Taxes Are Much Simpler
Filing taxes and figuring out your tax liability is a lot easier when you only earn a salary versus equity. You file taxes paying the tax bracket your income places you in using your W-2. There’s nothing too confusing about it.
You Aren’t Tied to the Company
When you accept an all-cash offer, you aren’t tied to the company because you’re waiting to be vested. So you can come and go as you please, not that you want to change jobs often, but you won’t lose any compensation if you decide the job isn’t for you.
You Don’t Earn More if the Company Does Well
With an all-cash offer, you don’t get any equity in the company. If you happen to get into a company that performs well, you could leave money on the table. When you own equity in the company, your earnings increase as the company does well. If you take it all as cash, you don’t get ‘in on the action.’
The Pressure to Invest and Grow Your Wealth Is on You
When you receive your entire compensation as cash, it’s up to you to invest it and make your money grow. Most millionaires didn't get where they are by getting paid a salary. Instead, they all had equity or investments in assets that grew and created their wealth.
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What Is a Cash + Equity Offer?
Cash + equity options offer includes a lower cash offer than you’d get with an all-cash offer, but you make up the difference with an equity offer. Most employers don’t pay out the equity right away. You must meet specific time requirements (be vested) to be eligible.
Employers can offer equity in a variety of ways, including the following.
RSU (Restricted Stock Unit)
An RSU is a restricted stock unit. Initially, it’s worth nothing. They are only worth something when you’re fully vested. Each company sets its requirements for vesting, so pay close attention to the terms.
Once you’re vested, your RSUs are converted to shares of the company’s stock. Most companies set a vesting period over a series of years. Companies do this to encourage employees to stay longer. For example, you may receive some of your stock units after six months, more after two years, and the final payment after four years.
The nice thing about RSUs is you are the owner of the shares once you are vested. You can keep them or sell them - the choice is yours. Keep in mind, though, that you’ll pay taxes on the capital gains. It’s best to talk to a financial advisor before accepting this option.
ISO (Incentive Stock Option)
ISOs or Incentive Stock Options are another form of deferred compensation. They are aptly named because, like RSUs, they are worth nothing when you first receive them. You don’t gain ownership of the shares until you satisfy the vesting schedule.
Once you reach vesting, you have the right, but you aren’t required to purchase shares of the company’s stock at your strike price. Most ISOs are good for ten years from the date of vesting, giving you options.
If the market price of the stock is higher than the strike price, you’d benefit by exercising the right to buy the stock. You’d earn instant equity if you were to turn around and sell the shares, but it may benefit you more to hold onto them for the long term.
The benefit of ISOs is you don’t have a tax liability until you sell the stocks and if you earn capital gains.
ESPP (Employee Stock Purchase Plan)
An Employee Stock Purchase Plan is another common form of compensation. With an ESPP, you can buy company stock at a discount of usually 5% - 15%. To do this, you must defer a percentage of your salary, and the shares are purchased usually every six months using your deferred salary.
While you must dedicate a portion of your salary to the plan, it’s like paying $85 for $100. You are always buying the stock at a discount. You can choose to keep the stock and ride it out or sell the stock right away and earn the capital gains (paying the appropriate taxes).
Related Article | The Ultimate Guide on Equity Compensation and Taxation
Pros and Cons of a Cash + Equity Offer
Like an all-cash offer, there are pros and cons to a cash + equity offer. Here’s what you should consider.
You Have the Chance to Earn More Money
A salary is a set amount of money - there’s no growth in it unless you invest it yourself. An equity compensation has the chance to pay you more than the amount of salary you would have earned in its place, making your money grow faster.
You Can Grow With the Company
If the company does well, so do you when you are part owner. If the company historically does well, it can be a good idea to take at least some of the compensation as equity so you can enjoy the growth.
It’s Easier to Stay Loyal
If you want an incentive to stay at a job, take equity compensation. You’ll have more incentive to stay at least through the vesting period, so you can do what you want with the investments. If the company does well, you may stay even longer to enjoy the continued growth.
You Run a Higher Risk of Loss
There’s no guarantee a company will do well or that its stock will hold its value. There’s a chance once you become vested, your equity could be worth next to nothing. It’s a big risk to take, which is why looking at things like the company’s historical performance is important.
Your Compensation Is Deferred
Depending on the company and their vesting schedule, you may have to wait quite a while for your remaining compensation. It can feel like you’re being ‘slighted’ with the lower salary while you wait to be vested.
If the Company Goes Under, You Lose
If the company doesn’t make it to your vesting period, you lose out on the extra compensation you were promised. When you take it as an all-cash offer, you get paid as long as you’re working. Obviously, if the company goes under, you won’t have a job any longer, but you’ll have earned your compensation up until that point.
Choosing between an all cash and cash + equity (consulting vs private equity) offer is a big decision. Weigh the pros and cons of each, look at the company’s historical performance and decide what financial goals you have for yourself.
If you prefer to handle your own investments and will make your money grow using other methods, an all-cash offer may be more appealing to you. But if you thrive on the motivation of helping the company grow, knowing you’ll be a part of that growth and equity, a cash + equity compensation may be worth considering.