What happens when your job is more than a paycheck?

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Cut down on the BS and put common personal finance phrases into plain language.

You already invest your time in your 9 to 5, but if you could also invest financially in your work? Let’s see the ins and outs of equity compensation.

Equity compensation is a payment from your employer in the form of stock or the ability to buy stock at a discount. With equity compensation, you can be more than just an employee, you can also become an owner.

Equity grants look different depending on whether you work for a public or private company.

“With public companies, once you have the stock subsidy, outside of blackout periods or times when your company limits your ability to sell stock based on your insider knowledge, you can usually just sell because it is a public market. You have the ability to liquidate and turn that equity into cash,” Jane Alexander, Carta’s chief marketing officer, told Money Scoop.

“In private companies, there isn’t a millisecond-by-millisecond stock market for private stocks. You have certain restrictions on your cash. That being said, you have the option of selling your shares outside of a [public listing]. The most common we see is called a takeover bid,” Alexander said.

The other thing to know is the type of equity compensation program offered by your employer. There are three main types, each with its own acronym:

  • Limited stock. These can be Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs). These are shares given to you by your employer and taxed at your income tax rate once your shares vest.
  • Stock options. There are two types: non-qualified stock options (NSO) and incentive stock options (ISO). These both give you the option to buy shares of the company at a predetermined strike price over a vesting period, but they are taxed differently.
  • Employee Stock Purchase Plans (ESPPs). Similar to stock options, although offered exclusively by public companies, ESPPs allow you to buy company stock with discounted after-tax dollars by choosing only a percentage of your salary is allocated to the purchase. You will have to pay taxes when you sell your shares.

Employee stock compensation can be a way to build wealth, although there are no guarantees. It can also present its own set of problems, including the fact that it can be used to supplement a below-market salary. But if you’re passionate about your employer and investing in their stock fits your overall financial plan, there can be a big upside.Myriam

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