Why contractors deserve equity

Author:

Anthony Cimino

Published date:

18 May 2020

As gig workers take on more and more of our economy’s essential services, from grocery and food delivery to transportation, it’s vital that we make it possible to extend equity to contractors.

Why equity is important for gig workers

The benefits of equity compensation—in addition to a paycheck—for both employee and employer are significant:

• Equity incentivizes workers to stay for the long-term vs. hop from job to job, creating a better customer experience and reducing the cost of hiring;
• Equity is less expensive for early-stage startups to give as compensation, since its true value accumulates over time; and
• Equity ultimately allows employees to share in the unbounded value creation taking place in the private markets

We must make changes if we are to make  equity compensation part of the new normal in the gig economy.

First, the SEC rules around who can be given equity needs to change. Currently, private companies aren’t able to easily give equity to independent contractors in the gig economy.

Secondly, even though some employees have been receiving equity for decades, many don’t fully understand their options. As equity gets more widespread as a form of compensation, it will only succeed in increasing social mobility and reducing income inequality if people are empowered with knowledge around the value of equity and how it works.

In America 2.0 every worker will contribute to the turnaround and their employer’s success. I’m a big believer that everyone should get equity in a company. Equity appreciation is the only way to get beyond living check to check and building your net worth.

Why gig workers can’t get equity today

Under SEC Rule 701, private companies are allowed to give stock compensation to employees, consultants, independent contractors, and other “de facto” employees.

The legal classification of participants in the gig economy, however, remains a grey area.

Because of this, many of those who have contributed to the tech economy over the last decades have been left out of its biggest gains.

But a few companies are finding ways around it… companies like Good Eggs and Managed by Q have spread the upside by classifying their workers, from packers and delivery drivers to office cleaners, as employees.

Others, like Uber and Lyft, have been able to do it by giving their workers equity once they went public. The problem with this is that fewer companies are going public and those that do, wait longer and, as a result, no longer make the massive public market gains they did in the 1990s.

The real growth is happening while companies are private, which is why gig workers (and everyone else) deserve to be able to get equity early.

Lately, the idea of clarifying the rules and loosening restrictions on stock compensation has come back into the conversation. In March, Patrick McHenry, the top Republican on the House Financial Services Committee, urged the administration and introduced legislation to relax Rule 701’s restrictions specifically for gig workers—not just to make life easier for them now, but on a higher level, to “ensure that all workers have ownership in our recovery.”

If there’s going to be change, it’s essential that it starts with changing the rules that make it difficult for contractors to get equity in the first place.

Providing more information about equity

Equity without the right context can be counter-productive, because the economic benefit of ownership (especially with private companies) isn’t something that’s intuitively obvious.

For a baseline level of knowledge, workers need to understand:

• All equity involves risk. If a company fails or gets acquired at an unfavorable valuation, then their shares may not end up with much or any value;
• A diversified portfolio is safest. Tying up a majority of their net worth in their company can lead to non-optimized decision making; and
• The potential upside. Based on the strike price and the company’s current valuation, what kind of value an employee can expect to see during a liquidity event.

Beyond those basics, workers getting equity should know:

• The type of options they’re getting (incentive stock option (ISO), non-qualified stock option (NSO), restricted stock unit (RSU);
• Whether early exercise is allowed;
• How many shares they’re getting + their strike price + their post-termination exercise window;
• The tax implications of exercising (and selling shares);
• Their vesting schedule; and
• How their shares are affected by acquisition or termination

With the right education, getting equity means getting a potentially valuable asset that can bring these workers significant long-term financial benefit. Without it, it can mean missed opportunities and surprise tax bills.

Equity for the 60 million

The companies that ushered in the era of the “gig worker” have generated a great deal of value for society and for the economy.

These individuals deserve the paycheck that helps them meet the needs of their everyday lives and save for the future. They also deserve equity. We are not seeking to replace their paycheck, but rather help them build ownership. With equity, we have the opportunity to spread that value more fairly and help the gig workers themselves reap some of the upside they’ve helped create.

By giving them the same opportunity for ownership in their companies that founders, executives, and salaried employees enjoy, we can offer the nearly 60 million contractors working in the gig economy an opportunity for unbounded wealth accumulation.