By Jane Alexander, CMO at Carta & Joseph Blasi, J. Robert Beyster Distinguished Professor, Director of the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University
Albert Einstein reputedly called compound interest the eighth wonder of the world. If that’s true, equity ownership just might be the ninth.
A salary is a promise to pay you for your work. It is a debt instrument (I owe you money) with a bi-weekly coupon (I’ll pay you every other week). And by definition, debt grows linearly. But equity ownership can grow exponentially. Equity ownership can benefit from favorable tax treatment, provide passive income, and sometimes grow even faster than compound interest can. It is one of the greatest generators of wealth there is.
Equity ownership in private companies can be a particularly attractive way to build wealth. Private companies have seen remarkable growth in the last few decades, and as a result, have seen unprecedented investment from professional investors. To invest in public companies, all you need is a Robinhood account. But in order to invest in private companies, you need to be an accredited investor. Until 2020, the only measure of whether someone was an accredited investor or not was how much money they had or made.
Getting equity as an employee is like a cheat code to equity ownership. As an employee of a private company, you can be an equity owner without having to be an accredited investor. The equity you receive is part of your normal compensation package. And as you’re working to build the company, you are also working to increase the value of your own ownership stake in it.
But employees with equity—with this amazing cheat code—are leaving money on the table. Last year, more than half a billion dollars in vested employee equity expired. Nearly half of these expired options were “in the money”—meaning their fair market value was theoretically greater than their strike price at the time of expiration. So what is happening?
Equity seems complicated
Most people don’t get a guide to equity ownership when they graduate. They don’t have a hotline to call with questions about their offer. And so they get equity grants without fully understanding them—what it means to vest, or how to exercise their options.
Equity can feel complicated–even intimidating. With equity, there’s an alphabet soup of acronyms to contend with (like ISOs or NSOs or RSUs or PTEs). You not only have to vest your shares but also exercise them. And even though equity can benefit from favorable tax treatment, the way it is taxed is different from cash and it can be daunting to make sure you’re calculating your tax obligation correctly.
But it’s not rocket science. All you need is someone to explain it to you.
Equity 101: A masterclass in equity
Carta built Equity 101—a free course about the ins and outs of equity, built and vetted by experts–to do just that.
The course starts at the beginning—with “What is equity?”—and it takes you through the moment you decide to sell. The ten interactive videos are free and available online, so you can watch them at your own pace and on your own time. Start at the beginning, or skip through to “How vesting works,” or “How are equity grants taxed?” when you need them most. You can finish the whole course from start to finish in about an hour.
Everyone has to start somewhere when it comes to equity—even icons in sports and music and entertainment. When Alex Rodriguez, one of Carta’s partners for Equity 101, pivoted to business after baseball, he kept a cheat sheet of financial definitions in his wallet. He recognized right away just how important it is to understand equity.
He’s not the only one. Serena Williams, Tan France, Kerry Washington, Ashley Graham, and Steve Nash all joined Carta in Equity 101. They believe in the power of equity to create wealth. And they understand just how important it is that people have a cheat sheet of their own, a way to get answers to their questions about equity.
Moving to an ownership economy
Today we live in a world where the vast majority of employees rent their time to companies, who give them cash in exchange for our time. When they leave that job, they’re left with whatever of that cash they were able to save up. But think of what that person did with that time. Maybe they fixed an internal system that helps the company run more efficiently. Maybe they built a feature that expanded your product in a new way. Maybe they joined on Day 1 and built the brand from the ground up. When they leave, their work lives on–often continuing to increase the value of that company. But their paycheck does not.
At Carta, we call this the era of payroll. The next era of labor will be the era of ownership.
This will happen slowly, then all at once. Before World War II, it was unheard of for an employer to provide health insurance for its employees in the US. Now it’s unheard of for an employer not to. The same will be true for employee ownership programs.
We already saw this flip in Silicon Valley. We’ve come a long way from the Traitorous Eight giving equity to their employees in 1957. Last year there were over half a million employee-owners on the Carta platform. Equity compensation is the new norm in technology.
And we’re seeing the shift elsewhere too. We’re seeing a revolution in Private Equity led by KKR, Silver Lake, and Goldman through Ownership Works. Companies like Harley Davidson, Fireclay Tile, and Chobani all have employee ownership programs. Athletes and actors are asking for equity instead of cash for their endorsement deals. When Beyoncé was offered $6 million to perform for an Uber event in Las Vegas, she asked to be paid in equity instead.
We have an opportunity, with a little basic education, to get hundreds of millions of dollars in equity back into the hands of employees—giving them a chance to build the kind of lasting generational wealth that lifts up entire communities. And the good news is, it’s simpler than we think.