Unbundling Cash & Equity
Unbundling Cash & Equity
Theory #15 | a heretical take on "total compensation"
If you've worked in tech, or at any big company, you've probably heard the phrase "total compensation.”
Total compensation, or TC, has many parts, with cash and equity the most discussed. Full-time jobs that offer cash-plus-equity are celebrated and positively symbolic of Silicon Valley ethos. Salary is reliable and risk-free. Stock is risky yet offers upside.
But seeking both from a single opportunity has real tradeoffs. Instead, what if you unbundled cash and equity? Seek both, but from different opportunities.
This is a counterintuitive philosophy of total compensation and work — one that I believe more ambitious, entrepreneurial people will adopt in the coming years.
The cash-equity tradeoff
Cash-plus-equity offers have an inherent tradeoff.
Employers may present it as a sliding scale — take more cash, get less equity, and vice versa. Employees choose a relative mix based on cash needs, risk appetite, and belief in the company.
People tend to compare compensation offers of a similar type, but rarely across types. What do I mean? I broadly see 3 major compensation types: cash-only, equity-only, and cash-plus-equity. I’ve held all three job types, and I’ve engaged with many peers who’ve held two or more of them in their career.
Consider 6 illustrative jobs and their cash-equity mix:
Here's the same chart with descriptive examples:1
Now let's break this down into cash-only, equity-only, and cash-plus-equity opportunities.
A and B are cash-only. These could be "9 to 5," part-time, and/or or contract roles at a high hourly rate. In non-traditional tech or fields like banking and medicine, even the most sought-after full-time jobs are cash-only – high base salary, or a moderate base salary plus a large bonus.
C is equity-only. The best example is starting something new, e.g. building a brand, founding a startup. To start, you get zero cash, but you own all the equity. It's hard to peg the value early on, but if you could raise VC for example, you'd get a non-zero valuation.2
D, E, and F are cash-plus-equity.
A company like Google pays well, its stock has reliable value, and it’s liquid (i.e. can be sold on public market).3
Startups that haven't “broken out” yet tend to offer lower than market salary and have low expected equity value.
"Rocketship" startups offer lower than market salaries, but still on the higher end of all startups since they attract lots of funding. Equity promises large upside.
On additional note — the cash-equity tradeoff is actually a cash-equity-effort tradeoff. At startups, you don't just take a lower salary for equity, you put in disproportionately more effort, e.g. 80+ intensely productive hours per week.
The cash-plus-equity (pipe)dream
The allure of cash-plus-equity is that equity can be worth a lot. The dream is that equity value grows exponentially as the company matures, but the reality that "most startups fail" means that most equity goes to zero.