Cash vs. Equity: How Giving Employees a Stake Pays Off

This week, entrepreneur Mark Cuban laid out an idea for all employees of a business to receive company equity as part of their compensation. His stated reasoning was that this would be a tool to help tackle rising income inequality.

As someone who works with companies on their equity and pay structures, this caught my eye. In fact, I remember a time when a company I worked for chose to replace equity with cash pay for entry-level warehouse workers. Ironically, the company's stated goal was also to address income inequality.

I won’t use this post to debate Cuban’s specific ideas. Instead, I want to look at how equity works as a pay strategy, why employees care about it, and how a growing business should evaluate it.

What Is Equity Really Worth?

In simple terms, equity represents ownership in a business. On a financial balance sheet, accounting equity is calculated as total assets minus total debts. This is called the "book value."

However, when you give equity to employees, you aren't using book value. You are using the company's Fair Market Value— what the business is actually worth on the market based on its earnings, brand value, and growth potential.

When you give employees equity, you make them partial owners. The logic is based on the following premise: when workers own a stake in the outcome, they are more aligned with the company's long-term success, and therefore become more productive.

How Ownership Helps the Business

Giving workers ownership in the company has repeatedly shown to be a net benefit to companies. A study from Rutgers University looked at public companies over a 13-year period and found that companies where employees owned at least 5% of the stock were 24% less likely to go out of business compared to companies without employee ownership.

The study showed that companies’ survival was based less on cash reserves available and more on employment stability and retention(remember retaining a good employee saves between 50% to 200% of annual salary costs for a company). Workers at employee-owned companies were more committed, stayed with the company longer, and worked together better during tough economic times, according to Rutgers.

Understanding the Upside (and the Catch)

An equity strategy as part of your overall compensation plan could be a long-term boon to employees.

Let's look at a simple example to see how equity can build wealth over time.

Imagine two workers at a business that grows 10% each year:

• Worker A: Earns a $60,000 cash salary each year (0% equity).

• Worker B: Earns $55,000 in cash salary plus a $5,000 equity grant each year.

Assuming 10% annual growth on those equity grants:

• Year 1: Worker A earns $60,000. Worker B holds $55,000 in cash + $5,500 in equity value ($60,500 total).

• Over 3 Years: Worker A has earned $180,000 in cash. Worker B’s cumulative salary and grown equity equal $183,205.

Of course, equity carries risk. If the business loses 10% of its value each year, Worker B would end up with $177,195 over three years.

The Catch for Small Businesses: In a publicly traded company, Worker B can sell their stock anytime. But in a private small business, equity is usually illiquid, meaning employees cannot turn their equity into cash whenever they want. They usually must wait for a major milestone, such as the sale of the company, an IPO, an exit, or a formal company buyback plan.

Why Employees Value Equity

Even with the wait, workers place high value on equity compensation. A 2025 study by Charles Schwab showed just how important stock ownership is to everyday employees:

• 76% of stock plan participants say equity compensation is very important to them.

• Nearly half (47%) consider equity a "must-have" benefit when choosing a new job.

• 72% say equity pay makes them feel confident they will reach their long-term retirement goals.

Choosing the Right Equity Strategy

Equity looks different depending on the size and structure of your business:

• Large/Public Corporations: Typically use Stock Options or Restricted Stock Units (RSUs). Stock options give employees the right to buy shares in the future at today’s set market price. If the company grows, the worker profit on the difference.

• Small Businesses and LLCs: Can offer real equity like Profits Interests (which give workers a share of future growth). Or, they can use synthetic equity like Phantom Stock or Unit Appreciation Rights, which, simply put, pays out cash bonuses based on company growth without giving away actual voting ownership.

Is Equity Right for Every Employee?

While I do agree that equity builds long-term wealth, business owners must consider their target employees’ immediate needs. An entry-level employee with student debt or a worker in a minimum-wage position may prefer immediate cash pay over equity that might take years to pay off—the classic "a bird in the hand is worth two in the bush" mentality. Their needs may outweigh the perceived benefits, and now you struggle retaining, or even hiring, workers.

That said, growing and bootstrapped businesses should seriously evaluate equity as part of their compensation strategy. It allows you to attract top-tier talent, boost retention, and align incentives without overcommitting your short-term cash flow.

If you are a growing business considering an equity strategy for your team and would like to chat, let’s set up a call today!