Economic Security
You can be anything you're good at, as long as they're hiring
— Chris Rock, “Tamborine” Netflix special
Chris Rock is a comedian so anything he says should be taken with a grain of salt.
Aircraft emergency procedures says you should put on your own oxygen mask first, before helping others. It makes sense - you’ll be in a better position to help other passengers if you are not struggling for your next breath.
Similarly, while “making the world a better place” is a wonderful thing, your first order of business when entering the job market should be creating economic security for yourself and your family.
There are many paths to creating economic security, and most involve some form of ownership. That’s what we’ll explore next.
Ownership
If your lifestyle diminishes or crumbles entirely if you’re out of work, you haven’t created economic security — that comes through ownership.
Since we were little we have been pushed by our parents or guardians towards getting a good quality education so that we can land a high-paying job and become a doctor, a surgeon, an architect… but this is also most likely when the advice stops. What’s next?
While a high paying job can be a tremendous leg up, it is by no means a guarantee of economic security (I recommend reading The Millionaire Next Door to understand why).
One form of ownership which is common in the US tech sector is through employee equity programs. It’s a way for employees to own a piece of the company they work for through shares in the stock market.
In other countries, such as Australia, this practice seems less prevalent so there is a general lack of understanding about this topic. As a result, a lot of people end up choosing the security of a little extra cash in hand in the short term as part of their salaries over the potential upside of long term share ownership.
Employee Equity Programs
Employee Equity Programs (EEP) are a simple way for individuals to exercise ownership on the business for which they work through owning shares.
These usually come in two broad flavours: pre-IPO and post-IPO grants.
Pre-IPO grants give the individual a number of shares, each priced at the current private valuation of the company. Because the company hasn’t yet listed in a public exchange, you cannot trade the company shares so there is no immediate benefit.
Post-IPO grants work in a very similar way, except the company is already publicly listed and therefore you can sell your shares as soon as you own them and they are fully vested.
Vesting
Most equity programs come with a vesting schedule. In my experience the most common vesting schedules happens over four years with a one year cliff.
An example should clear things up:
Let’s say I give you 100 shares at today’s price, $1. You can’t sell them because they haven’t vested yet. The vesting schedule looks like so:
100 shares received on 01/01/2021 at $1 (you cannot sell them)
25 shares vest on 01/01/2022. You can sell up to 25 shares as of 01/01/2022. (this is the cliff)
25 shares vest on 01/01/2023. You can sell up to 50 shares as of 01/01/2023.
25 shares vest on 01/01/2024. You can sell up to 75 shares as of 01/01/2024.
25 shares vest on 01/01/2025. You can sell up to 100 shares as of 01/01/2025.
The key takeaway is that even though you cannot sell all your shares from the moment you receive them, they are priced at the date they were granted, allowing you to take part on any appreciation thereafter.
So if on the 01/01/2021 they were worth $100 and four years later your company’s shares appreciated 120%, you would have made a profit of $120 - with a total of $220 in equity ownership.
Why a vesting schedule
Companies are perfectly capable of issuing shares without a vesting schedule —meaning you can do whatever you want with them straight away — so why don’t they?
Because they want to reward long-term thinking.
One extreme example is Amazon which goes as far as to set a ceiling on base cash compensation with the rest coming in the form of company stock. When the company does well, everyone benefits so employees have an incentive to think beyond the next 6-12 months.
The book Working Backwards is an interesting read about Amazon’s internal processes and also talks about their approach to promote and reward long-term thinking.
Risks
Employee equity plans are definitely not all roses. Companies, especially startups, go out of business all the time, leading your total grant value to zero. Others just tick along without much movement in share price, such as Twitter.
I have personally worked at 3 companies which provided such equity plans.
One of them paid off and I am grateful for it. The other one went out of business and I never realised any benefit from owning those shares. The third one is still playing out.
That’s a 1 in 3 chance of a good outcome. That’s enough for me — I will always consider ownership as part of my compensation. It really does change the way I approach work.
So, should you accept an equity plan?
The point of writing this post is to provide you with enough information to explore this option, should it be given to you by your employer — not all employers are this generous.
Don’t pass on the opportunity to exercise ownership and therefore build economic security purely because it may seem confusing at first.
Collect as much information as you can about the offer, chat to friends and your accountant to understand the tax implications and only then make up your mind.
Lastly, remember: this is not financial advice and you should totally speak to your accountant or financial planner before taking any of this onboard. The content in this post is for educational purposes only.
If you have a question for me or a suggestion for the newsletter , please submit it here - I’ll address as many as possible in coming issues.