Today we are going to start with a visualization: I want you to fast-forward to June 1st, 2024. You have been offered a new job with a $200,000 salary, plus $100,000 in equity in the company, and the VP title. You are smiling ear to ear thinking that you just landed yourself a job paying $300,000. Congrats!
But here’s the thing, it’s not really a $300,000 salary. I see this happening repeatedly in my financial planning practice. So many people (and yes both men and women) don’t fully understand what they are getting into by getting stock in their company. Especially if it’s a private company.
Today I want to focus on stock in private companies, and in a future publication we can dive into public stock compensation.
I commonly refer to ownership in private companies the “lotto ticket”. Now you might be thinking, but why, Caroline? I’m being given $100,000 of equity every year!
The answer to this- not exactly. As with any item or service in this world, it’s only worth as much as someone else is willing to pay for it. With stock in a private company there’s several things to consider:
1.What is truly the potential for this company to either be acquired or go public?
2.If neither of those happens, is there someone else at the company willing to buy your shares?
3.How often is the company valued? Unlike a public company that trades on the market daily, private companies do their own valuations limiting owners (aka your) knowledge on what that stock is worth
4.Understand how your shares are vested (how you actually come to own them) and what happens if you leave the company
5.What (if any) money are you being asked to pay out of pocket? You read that right, you might be granted stock options which is different from being outwardly awarded shares
In your overall financial plan, stock options or stock in private companies can be a lotto ticket because there are so many question marks about the future. When building your plan or working with an advisor you want to know that you will be ok financially if these shares end up being worthless. And if this company becomes the next hot stock on the S&P500 then you just won the lotto (hence the term “lotto ticket”).
Keep in mind this is an oversimplified view of private stock equity. You should consult with your financial advisor and accountant to review the tax implications.
Tanis Financial Group is a dba of Women’s Wealth Boutique (“WWB”), a registered investment advisor with the States of New Jersey, Ohio, Colorado, South Carolina, Michigan, Alabama, Virginia, and Indiana. WWB and Tanis Financial Group are not under common ownership but owned and operated separately. All financial planning and advisory services are provided by Women’s Wealth Boutique.
