The truth about employee equity: what you’re really getting (and why it’s built that way)

Following my last blog on the BrewDog employee equity illusion, many people have expressed surprise, nay consternation, about how capital stacks, preference shares and employee equity economics work in practice. This blog is intended to be a helpful primer, spelling out the truths, rather than the illusion of certain types of employee equity in certain types of companies with certain types of capital structures. Enjoy.

Employee equity promises a lot - ownership, alignment, upside.

And those promises can be delivered. But only if we’re honest about what’s really being offered and why it's structured that way.

Because equity awards aren’t just about participation. They’re legal and economic instruments and every clause tells a story about control, risk and commercial logic.

This isn’t about illusions. It’s about truths. Especially the truth where there is a major investor or PE fund behind the scenes.

Truth #1: You don’t get control and that’s deliberate

Most employee equity comes with limited or no voting rights. Unless you are senior management, you won’t be invited to board meetings. You probably won’t even get investor updates.

That’s not an oversight, it’s how these plans are meant to work.

Equity awards are structured to align economic interests, not to turn every employee into a co-director. In private companies especially, founders and sponsors need to retain tight control over exits, financing decisions and strategic pivots. If 50 option holders could block a sale, the business would grind to a halt.

Truth #2: You’re last in line and that's the incentive

Employee equity invariably sits below the institutional capital stack, below preference shares, ratchets and debt.

And that’s exactly what makes it meaningful.

Investors (like a PE fund) take real risk by committing quite large sums of capital. To manage that risk, they use structured instruments like preferred equity or convertibles that give them priority access to sale proceeds. These don’t guarantee success, but they protect the downside and secure a minimum return before any value flows to ordinary equity of the type held by employees or management.

Example:

In a PE-backed business, the PE fund holds preferred shares carrying a 2x return hurdle, meaning the investor must receive twice its invested capital before value flows to the ordinary shareholders. Suppose the investor put in £50m. The business sells for £120m. The first £100m goes to the investor to meet their return hurdle. That leaves just £20m for ordinary shareholders.

Management held 5% of the fully diluted equity, but their stake was in ordinary shares, which only shared in that £20m surplus. So they receive £1m (5% of £20m), not 5% of the total sale price. 

The manager's equity wasn't worthless, but it only delivered value once the business had materially outperformed. This is how equity drives behaviour. It is designed to reward real success, the type that genuinely and materially, moves the dial. 

Truth #3: Your value is conditional and that's fair

Equity awards are rarely unconditional. Most come with:

• Vesting schedules
• Exit-only rights
• Forfeiture clauses for leavers

Why? Because equity is about value creation, not just presence.

These mechanisms reward long-term commitment and meaningful contribution. They ensure that people who leave early don’t walk off with unearned value and they protect the interests of those still building the business.

Truth #4: Five percent of what exactly?

As can be seen from Truth #2, headline percentages can be misleading. You might be told you have “5% of the company” but unless you know the class of shares, rights and hurdles, that number is meaningless.

Ask:

• Is it 5% of the fully diluted capital?
• Is it 5% of equity value above a hurdle?
• Is it 5% only if you’re still employed at exit?

Your stake might be in growth shares, EMI options, a JSOP, or RSUs, and it might sit beneath a preference stack or vesting conditions that reduce its value to near-zero until a threshold is cleared.

That’s not a trick. It’s how equity allocates risk and reward.

Truth #5: You can't cash it in and that's normal

Equity might be valuable on paper, but that doesn't necessarily mean you can cash it in (which is perfectly normal).

Most employee equity is illiquid. There’s no market. No trading window. No guarantee of a buyer. And in private companies, value is usually realised on a specific event, like a sale, IPO or a secondary and hopefully, in the future, through Pisces.

Until then, your equity is just a promise, not a payout. That’s not an accident. It’s how alignment works.

Equity rewards long-term value creation. It encourages people to stick around and build something that’s worth more in the future. That means no early cash-outs, no partial exits, and no guarantee you’ll get anything at all if the company never sells.

Even in listed companies, awards may be subject to holding periods, dealing restrictions or tax charges that make early sales unattractive or impossible. 

So what’s the point? Well, timing risk is part of the upside.

If the business succeeds and you’re still holding your equity when the stars align, you could benefit from a material windfall - taxed (often) as capital, not income. But you need to understand the long game. Because equity isn’t a salary supplement. It’s a stake in a future that hasn’t happened yet.

So… Is employee equity worth having?

Absolutely, provided you understand it.

Equity is one of the few tools that lets employees share in the capital growth of a business. It can generate life-changing upside, benefit from favourable tax treatment and align teams with long-term value creation.

But it’s never “free money”. It's a leveraged bet on the future of the company and your place in it.

Final word

Please don't read my BrewDog blog and think employee equity is broken. It isn't. It is alive and well and thriving in so many forms, in so many companies and in so many countries. But for certain types of structures, it is frequently misunderstood.

At Burges Salmon, we help companies design plans that balance commercial rigour with genuine alignment. And we help individuals understand what their equity is really worth on paper, in practice and in the deal room.

Because, in the end, ownership is about outcomes, not just headlines.