In some situations, companies are looking for alternative ways of paying their developers. They are mainly common among private companies that intend to be publicly traded in the future and startups that do not have a lot of cash. However, different types of companies can offer alternative payments to any independent developer. Those include company stock in the form of stock options, outright stock grants or restricted stock. Also, e-commerce development specialists can be offered to be paid in shares, the percentage of the profits or equity. Let’s together dig into the meaning and fundamental differences of those ways of paying.
Getting Paid in Equity
The equity-based way of payment is often used by young startups that want to grow their companies but cannot offer large salaries to skilled professionals. Typical arrangements seek to either fully or partially compensate them with stock in the company in exchange for work. Depending on where the developer is in his career such offer could be an excellent opportunity. It can be a great investment of your time and knowledge if you work for the right business.
Company stocks or employee stock options (ESO)
Many modern companies use employee stock options (ESO) plans to attract and keep workers. An employee stock option is a non-standard contract that is popular in IT industry. It is a compensation contract that is offered to the developer as a part of his or her remuneration package.
According to ESO, the employer has the legal responsibility of delivering a stated number of shares of the developer stock. That should be one when and if the employee stock options are exercised. Depending on the maturity of the options and the vesting schedule, the developer may choose to exercise the options in the future. That obliges the company to sell the developer its stock at the exercise price. At that point, the employee has two options: either to sell the stock or to hold on to it expecting further price grow.
In most cases, stock-based payment arrangements involve developers that the company hires for a specific project. The stock is a part of equity, and it basically means the equity stake of its owners. It is up to the service provider to decide whether he or she is willing to give up a part of cash payment for some type of company stock. For instance, if a developer earns $50 an hour, a company might suggest paying $10 in stock and $40 in cash. That is like venture capital investing and brings money back into the company.
The logic behind such offer is quite clear. Firstly, it can reduce the cash outflow that is required to pay for the independent developer. Secondly, there is the hope that specialist will be more interested in the good outcome when he or she is paid partly in company stock.
Shares and percentage of profits in the company
With shares, company gives a specific portion of the company ownership. Therefore shares mean part of whatever the overall value of the company is. The developer gets money from shares only if there is a liquidation, the company goes public or is sold. And the percentage of the profits allows the holder to have a portion of the net profits generated annually.
For stable, older companies, there is often a close connection between the two. But companies that have just started in development of web applications, software and websites, can have a little difference between two notions.
For example, let’s say that you were developing a website for free video sharing, instead of creating applications. Let’s further assume that your developer wants to receive a profits percentage, instead of equity in the company. But he or might want to think a lot about what is more beneficial to him. Especially if the site, that is worked on, will be doing very well.
Generally offering a part of profit push the developer to focus on growing revenue profits, revenue and overall business. And therefore can help him or her to achieve success and add to regular salary in the long run.
Things that developer should consider before accepting alternative ways of payment
You should assess company risks, including access funding and their ability to become profitable. That will show strengths, weak parts, threats and opportunities of the company you are planning to work in.
Check if the company has been funded. Such companies are usually a safer option than overload ventures. There are two main reasons for that. First, a funded company has a bigger budget. Developing a product with effective marketing strategy it is not a cheap process, and the company that you choose must have stability for doing that. Second, funding is a sort of approval from an expert investor. Person will not invest in something that has no potential. Besides, as a rule, qualified evaluation was performed on every aspect of the startup before investment.
Type of equity
Before making a decision, you need to choose the kind of equity you want to receive. There are two of them: pure and one with compensation. Specialists consider pure equity agreement a reasonably risky. The prospective pay-out could be huge since the size of offered equity is most likely significant, if no money is involved. But, if something goes wrong, or if the company takes very long time to start making money, you might be in losses. A better arrangement is equity with compensation. That means that part of your salary is augmented with equity.
Your work position
You must give a good thought if such offer is appropriate for your current work position. Always be aware that extremely high offers may be a sign of problems in the company. And they are just looking to attract qualified workers without paying them money. Analyze the offered equity and stay in cold mind.
Your place in career
An alternative way of payment (especially full one), must be considered in the context of the stage of your current job. If you are a young specialist, who has the energy and time to work overtime hours to successfully grow your equity stake, this kind of pay arrangement might be great for you. But, those who are already earning substantial salaries and have established themselves in their careers, should think twice about it. As alternative payment is only a wise investment if you plan to put hard, extensive work into growing its value, these sorts of arrangements are suitable for those who seek career establish and just begin building capital.