A Pathway to Generational Wealth: The Case for Equity Compensation

February 21, 2024

For millions of first generation Americans and professionals of color, building generational wealth is the #1 goal.

But Why?

Many of us are the first in our families to graduate from university and land a white collar job, meaning the onus to bring our parents or siblings into the middle class falls on us.

I speak from experience. My grandparents and parents were agricultural workers in Northern Mexico; my parents came to the United States in the Reagan Years with hopes of earning higher wages before starting a family. So, when I graduated from UC Berkeley in 2015, I was the first person in my family to graduate from college, much less an elite one.

And truth be told, there was a lot riding on my success. As any first gen will tell you, I pushed myself hard to graduate with a high paying job. And when I did land a six figure salary, I immediately began helping my parents pay off their mortgage. It was my way of paying back my parents for leaving everything they knew to set me up for a better life.

The High Salary Myth

But as I quickly learned in my first job after college, a high salary is not “wealth,” much less of the generational sort.

Now, listen. Credit where credit is due: DEI professionals have worked tirelessly to increase diversity in the most prestigious companies like Google or Meta, where the hefty salaries are the envy of the American economy.

Yet salaries are highly volatile, and in the case of recent layoffs, a salary, even from a reputable FAANG company, can disappear in an instant.

At best, salaries are just one variable of the wealth equation and a short term one at that. So then, what is the missing variable of generational wealth? And how can first gens and professionals of color (POCs) achieve it?

I’ll give you a hint: Ownership. Specifically, ownership of high growth assets.

Asset owners in this country aren’t rich because they’re paid a high salary. No. Asset owners are rich because their assets generate returns on their behalf.

"But how does one become an asset owner without a generous inheritance, a winning lottery ticket or both?"

The answer is equity compensation.

The Role of Equity Compensation

Equity compensation is non-cash payment companies offer employees as part of their overall compensation package and which represents some form of ownership of the firm by the employee. Examples include stock options, performance shares, and restricted stock units.

Public companies like Meta can offer their employees stock options as part of their compensation package so that employees can own part of the company in the form of shares. During my stint in consulting, my company offered an Employee Stock Purchase Program (ESPP) that allowed employees to use a portion of their paycheck to purchase company shares.

This is even more apparent for small but high growth companies that also offer equity compensation to their employees. A common example is startups, which often offer equity compensation in the form of options.

Since options are an instrument that allows you to buy shares of the startup at a pre-specified price, called the “exercise price," sometime in the future, should your startup’s valuation increase and lead to an exit event (initial public offering or acquisition), your shares would be purchased at a premium relative to your exercise price. And given the massive uptick in valuation that is (usually) associated with an IPO or acquisition, early employees can generate vast amounts of personal wealth.

The Best Part?

Assuming your shares are vested and you’ve exercised your options, these shares are yours to keep even if you leave your company.

So, not only can first gens and POCs earn a decent salary, but they are also able to build their wealth alongside their company. This not only incentives employees to outperform, but it also sets in motion a virtuous cycle.

Early employees of companies that were successfully acquired or IPO’d often use their newfound wealth to found their own high growth companies and in turn, offer equity compensation to a new generation of talent.

You’ve heard of the Paypal Mafia, right? Exactly.

My Experience

Equity compensation is multiplicative in nature. It not only has the power to uplift this generation of first gens and POCs but also the many generations to come.

Now, I know what you might be thinking: “Not everyone will go on to build the next Tesla!”

And, statistically, you would be right. I can only speak from my experience.

At my first startup job, there was a 1:1 link between my effort and the resulting wealth I was able to generate. Whenever I closed a new customer or exceeded my quarterly quota, I contributed to scaling my startup, which in turn made any option I owned more valuable.

And it paid off!

When I finally left my startup job, I was able to use my newfound wealth to launch my current venture, Spark, a platform that helps first gens and POCs break into startups. My ultimate goal is to help 1 million first gens and POCs achieve generational wealth in this way.

See where I’m going with this?

Generational wealth creates a virtuous cycle where the newfound wealth of one generation is passed on to and expanded by the next generation.

This is exactly how generations of Americans have been able to achieve immense wealth — and equity compensation allows first gens and POCs to do the same.

The Importance of ERGs

Embracing the path to generational wealth through equity compensation isn't just a solitary journey and ERGs play a crucial role. Offering a platform for sharing experiences, strategies, and successes. For first gens and POCs looking to navigate the complexities of equity compensation and leverage it for building generational wealth, the resources and collective wisdom found in ERGs can be invaluable.

To learn more about how you can support your ERG members in relation to building wealth through equity compensation, we encourage you to attend the NASPP webinar: Empowering ERGs: Equity Compensation and Financial Wellness. Where the below questions will be answered!

What strategies can ERGs employ to effectively communicate the value and potential of equity compensation?
What are common misconceptions about equity compensation among ERG members?
What are the key elements of equity compensation that ERG members need to understand for their financial wellbeing?
What specific challenges might ERG members face in grasping the concept of equity compensation, and how can we address these challenges in our education programs?
What resources and tools can be provided to ERG members to support ongoing learning and decision-making related to their equity compensation?

By Adrian Tovalin
Co-Founder & CEO

SparkGen