Equity compensation, also known as share- or stock-based compensation, is a type of non-cash remuneration in which employees receive an ownership stake in the company for which they work.
This form of compensation may include stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), and other equity-based incentives. The value of equity compensation is directly tied to the company’s performance, increasing when it does well and decreasing when it underperforms. In this way, equity compensation gives employees a stake in a company’s performance and potential growth.
This approach differs from cash-based remuneration, which stays the same regardless of company performance.
How equity compensation works
The employment agreement typically outlines how equity compensation works for an employee, including the equity type and vesting schedule (i.e., when they become eligible to participate).
An equity compensation vesting schedule is a structured timeline that determines when employees gain ownership rights to their equity. Rather than receiving full ownership immediately, employees earn their equity gradually or upon meeting specific conditions, such as length of service or performance milestones.
Vesting schedules are commonly used to incentivize employees to remain at the company. Popular formats include time-based vesting (where equity is earned over set periods), cliff vesting (where a substantial portion vests after an initial period), and performance-based vesting (where equity is tied to achieving defined goals).
Common types of equity, also called equity instruments, are:
- Stock options. This equity instrument grants employees the right but not the obligation to purchase a specific number of company shares at a predetermined price, known as the “exercise” or “strike” price, within a set timeframe.
- RSUs. Restricted stock units are shares in the company that are granted after an employee meets the vesting conditions.
- Performance shares. These are shares awarded to an employee when the business meets a goal or the employee achieves individual key performance indicators (KPIs).
The value of equity instruments is often realized during what are called exit events, such as:
- Initial public offerings (IPOs). In an IPO, employees and other shareholders may be able to sell their shares on the public market, turning equity into cash.
- Acquisitions. During an acquisition, the acquiring company may purchase outstanding shares from employees.
- Secondary sales. This type of exit event allows employees to sell their shares to private investors or through structured company programs.
Benefits of equity compensation
Equity compensation is mutually beneficial for employers and employees. By tying rewards to company performance, equity compensation directly aligns employee interests with organizational goals, motivating individuals to contribute to the company’s long-term success and innovation. Surveys conducted by Morgan Stanley at Work on the subject showed that most employers give equity compensation “MVP status for driving employee engagement.”
The use of vesting schedules encourages retention and loyalty. To fully realize the value of their equity, employees must stay with the company for a set period. This fosters a sense of ownership in employees and reduces turnover. The potential for future financial rewards draws candidates considering roles at startups or high-growth companies and can offset lower initial salaries and make the overall compensation package more competitive.
Additionally, equity compensation helps organizations conserve resources, attracting and retaining top talent without straining cash flow. This is valuable for businesses in growth phases or with limited financial resources.
Drawbacks of equity compensation
Employers and employees should consider several challenges that equity compensation could present. First, the complexity of tax rules and regulations varies widely across countries, making it difficult to understand the value of equity awards. Cross-border equity grants can trigger complex tax, legal, and reporting obligations, increasing compliance risk and administrative burden for multinational companies.
The value of equity compensation is inherently uncertain, as it depends on the company’s future performance and liquidity events such as IPOs or acquisitions, which may never materialize or result in lower-than-expected returns. And in some cases, employees have low financial literacy and do not comprehend the risks of equity compensation. According to a 2025 study, employees of venture capital-backed tech startups displayed a “high demand for startup equity grants … a high willingness to forgo cash compensation in exchange for equity—and little understanding of basic concepts related to the value and risks associated with these investments.”
Issuing new equity can also dilute the ownership percentage of founders and existing investors as more shares are granted to employees or new stakeholders.
Equity compensation for global teams
Equity compensation for global teams requires careful navigation of diverse legal, tax, and regulatory frameworks across jurisdictions. While equity grants can align global employees with company success and enhance retention, managing these programs internationally involves adhering to country-specific rules, such as the U.K.’s Enterprise Management Incentives (EMIs) or France’s Bons de souscription de parts de créateur d’entreprise (BSPCE) schemes.
The risk of noncompliance for a business offering global equity compensation is high, as are the penalties, including social security liabilities or tax disputes. To address such challenges, companies partner with an Employer of Record (EOR) that offers equity compensation across the globe. An EOR acts as a business’s legal employer in another country, ensuring consistency in the employee experience while mitigating risks through standardized documentation, real-time regulatory updates, and integration with human resources (HR) platforms to streamline administration.
Global equity for your global team
Velocity Global’s Employer of Record solution offers equity compensation to your team, no matter where they live. We ensure that you remain compliant with local jurisdictions so you can confidently focus on what matters: retaining invested talent and growing your team.
Want to learn more about establishing a global equity program? Contact us to learn more.
