I have found that many candidates interviewing at emerging orthopedic companies do not really understand the “stock equity” portion of their Job Offer. Likewise, the company executives writing the Job Offer often do not understand how an incoming employee might value such equity or even understand it.
Let me try to pull the covers back for you.
There are 5 basic types of equity that employees can have in a company. These include:
1/Common Stock: This is the most common form of equity, and it represents ownership in the company. Common shareholders have the right to vote on important company matters, such as the election of board members and major business decisions.
2/Preferred Stock: This type of equity gives shareholders priority over common shareholders when it comes to receiving dividends and assets in the event of the company’s liquidation. It is often said that the preferred shareholders are “first in line” or that they “eat first” at the buffet line. Preferred shareholders may also have additional rights, such as the ability to convert their shares into common stock.
3/Restricted Stock: RSUs (restricted stock units) are a type of equity is subject to certain restrictions, such as a vesting schedule, which must be met before the shares can be sold. When employees are granted RSUs, this equity shows up on their W-2 and becomes taxable income.
4/Stock Options: This type of equity gives employees the right to purchase shares of the company’s stock at a fixed price (the “strike price”) in the future. Usually a “change of ownership” (eg: acquisition, IPO) is required in order to execute stock options. Stock options are commonly used as a form of compensation for employees.
5/Phantom Stock: A type of equity that does not represent an ownership in the company but it represents a right to a cash payment based on the value of the company’s shares at a certain point in the future.
The preference of employees and board members may depend on their individual financial goals and risk tolerance. Some may prefer common stock for its voting rights and potential for greater returns, while others may prefer preferred stock for its more stable dividends and priority in the event of liquidation. Stock options and restricted stock may be preferred by employees as a form of compensation and a way to participate in the company’s success. Phantom stock may be preferred by employees as a way to participate in the company’s success without having ownership rights.
