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Take the cash. Always more risk in the fine print of the equity comp
Cash, unless there is a tax shelter benefit whereby you can get the equity contributed without having it taxed first.
I see that but what if they’re offering you more equity than cash (maybe to make up for the loss in equity due to taxation)?
To me it seems like you would want the equity because then not only do you have actual skin in the game, you could achieve higher returns, no?
Cash
people and companies change
and the fine print usually not in your favor
Does it matter if you leave the company? You still have interest in the deal, no?
It depends on the vesting and contingent on employment clause. There could be clauses where you fuck up later on (with broad interpretation) and you get nothing. You get terminated and you get nothing. There’s only so much money to pay everyone else (pref, firm expenses, etc), and you get nothing.
I’ve heard stories of people getting residuals long after they left the company and buying Mercedes. I’ve also seen how you get nothing. I think the trend these days is you get nothing (or something if all goes well).
In other news, I have a friend work at AirBnb in a job getting paid prob bottom 50% tier pay (just doing their job) but got stock options and with the IPO, going to cash out hundreds of thousands of dollars. Unfortunately I love real estate so much, but the real equity in our game almost always comes with high risk taking or outsized value creation. No gimmes.
A lot of different factors to consider when they start offering equity in lieu of additional cash (ie personal risk tolerance, firm profitability, market outlook, how long you plan to stay) and an emphasis on reading the fine print of the offer. There’s more upside potential when you’re actually getting a slice of the pie.
Ultimately I think it depends on if you think you’re already being paid at or above market. If you’re underpaid and they’re offering you equity to bridge the gap then that would raise some red flags for me. If you’re happy with your current all-in comp (salary + bonus) then taking a little equity piece could be a wise choice if your comfortable and have considered all the factors listed above.
That said, you have to trust the people offering you the equity. There tends to be a lot of structure around equity comp packages and principals often will leave themselves plenty of flexibility to rework your deal if they feel the need and you might not be able to do much about it. It’s never as simple as you get x% of Y deal.
Is this even a question? Cash. You know many millions of dollars DB MDs have lost bc of their stock?
So your question assumes there is a choice? Often the structure of comp packages is Base + Bonus + Long-term (equity/stock/carry/etc.). Sometimes you can co-invest (and maybe they offer a deferred comp via bonus setup to fund the co-invest, is that what you mean?). Co-invest is usually something more of a benefit than part of a traditional comp package (like an employee stock purchase plan), but some firm's will "bonus" your co-invest (like you buy 5 shares, they "give" you one, or something like that).
Either way, cash is cash. If you really have an either or choice, you essentially have an investment decision, and you are doubling down on your wealth where you work. So think from a portfolio management perspective (i.e. concentration risk). There may be short-term tax incentives for this, not sure if that is the case.
To add on, pretty much every single comp package I've ever heard of (including what I have now personally) makes payout or "vesting" of the long-term comp or the "bonus" part of co-invest contingent upon staying with the firm. This is a big part of why firms offer it, to create "golden handcuffs" and and make a major disincentive to leaving. If it is points/carry in a deal, you have to wait for deal to go full-term and have a liquidity event to get paid; leave early, get zero. Stock options/grants or gifted "bonus" co-invest likely have some "vesting" period from 3 to even 10 years (that can vary a lot). Only the cash portion of a co-invest is likely yours forever, just as if you were an outside investor.
Pretty spot on as usual.
I live in the Bay Area (Florence in the Renaissance; for wealth creation) so I’ve recognized that the best earnings for me in real estate will correlate with an expensive real estate market (as opposed to Facebook IPO in 2012, there was still significant upside to values post-GFC).
From a portfolio risk perspective, personally, investing in alternative trends that don’t necessarily follow the real estate market is a good way to diversify.
Yes, I could work at Jack in the Box and if I’d invest in FAANG that past decade, probably do great.
Anyways, what I’ve seen, and I been a part of enormous promotes, is when you look at the residual value, it is hyper sensitive to exit cap. Usually you don’t underwrite cap rate compression. What we’ve seen is compression the past decade with what looks like a bottom (or “top” if you’re thinking multiples). I’d rather put my money into things that benefit from multiple growth.
Now, if structured as carried interest, there are tax benefits. And I was all about that. But I think the illiquidity, the risk of getting nothing, the golden handcuffs, potential tax law changes, I think outweigh.
Don’t get me wrong, I worked on as many projects as I could. Ending up with more than double the next guy. But companies change, people change.
I will however say it is an honor to be offered to be part of the partnership. It is not to be taken lightly. You can do very well. You are like a VC with a bunch of portfolio companies (that’s how I describe it). It can be a great vehicle.
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