As the war for talent heats up, for startups who can’t match Big Tech’s big salaries, equity could be a key way to snag — and keep — talent.
Data backs this up: companies offering equity schemes are 26% more likely to have better quality hires and 42% more likely to receive higher ratings on Glassdoor.
But how should founders set up an equity scheme and how can potential new hires get their hands on a slice of the pie?
In our recent Sifted Talks we asked our panel what a successful equity scheme looks like. Our experts were:
- Louise Birritteri, founder and CEO, Pikl, an insurance provider for the sharing economy
- Tariq Rauf, founder and CEO, Qatalog, a digital work hub
- Yoko Spirig, cofounder and CEO, Ledgy, an equity management tool for startups
- Stacey Thompson, global head of people, Commsor, a platform for community led companies
Here’s what we learned.
1/ Educate your employees
It’s no good offering employees share options if they don’t understand how the scheme works or see the long-term benefits.
Thompson said Commsor uses equity management platform Carta to help employees understand the value of their equity, track their shares and see how they are growing.
Birritteri said that when Pikl first started many employees worked without pay, or below market rate, and really understood the value of their equity. But this changed as time went on and the team grew.
She now runs a series of activities for her employees to help them understand Pikl’s equity scheme. This includes talks from former founders who had sizeable exits, going through the terms and conditions of the scheme and making sure everyone understands key business decisions.
Sometimes you might make longer term investments which could seem a little bit strange for the here and now. They might not generate revenue for several years. But if you are looking at an ultimate exit value over a five year period, then it gives you a long term approach to how you plan” — Louise Birritteri, Pikl
2/ Work out how much to give away
When it comes to dividing up equity, the panel said the amount founders should give employees depends on different factors, such as what funding round the company is on and how long it’s been operating for.
Spirig said the process is becoming standardised. There are various benchmarks and guides from Ledgy that employers can use to establish who should get what.
Thompson said these benchmarks need to be constantly assessed and compared with sites such as Glassdoor to make sure the equity schemes remain competitive to potential talent. She added that equity bands should be based on the role; roles that are harder to recruit for, or more valuable to the company’s bottom line, should have equity packages to match.
There is an art and a science to it. You are trying to attract talent, you need to make it look appealing to the folks you are trying to hire and that’s why I think establishing those equity bands by role can be really helpful. You are able to come to the table knowing what is competitive” — Stacey Thompson, Commsor
3/ Employees: Know your — and the startup’s — worth
How can potential new hires negotiate the best deal for themselves?
Thompson said workers should learn about the company’s philosophy behind their compensation; it’s often harder to get raises in equity than raises in base salary as a startup grows, so potential employees need to ask recruiters where the flexibility is.
Rauf said it’s important to look at the growth stage and the maturity of a company along with the risk profile. This should help workers compare startups with their peers in the market and negotiate a better equity package.
If a Series B company is generating a million in revenue, it might be slightly behind what most other Series B companies are doing. Treat it like a Series A company even though it is Series B. Identifying the stage of the business and the maturity of the business and levelling that is a very important exercise” — Tariq Rauf, Qatalog
4/ Treat your employees like investors
When dividing up equity, Spirig says founders should consider offering equity to everyone at the company, as it helps retain employees and gives them a sense of ownership over the business’s success.
She added startups need to be open and transparent with their employees about how they have divided up shares — and how the business is doing. Ledgy produces monthly investment reports which are shared with everyone.
At the end of the day, an employee who owns part of the company is the same as an investor. If you leave the company, you are still invested in the company. We send them the monthly report as with any other investor we have” — Yoko Spirig, Ledgy
5/ Vesting 101
Share vesting, where employees gain rights to shares over time, can act as an incentive and keep employees committed to growing a startup. But how long should employees hold onto shares for and should all vesting periods be the same?
Birritteri said at Pikl, early employees had a four-year vesting period with a one-year cliff, but later employees had a longer schedule. She added some startups may need different vesting terms for different employees.
Thompson said that as roles change over time, the first 200 people hired at a startup may not have the same skills as the next 200 people. She saw a trend where companies offered a quarterly vesting schedule instead of a yearly one.
Rauf said that secondaries, where employees sell their shares, usually happened when startups reached Series D or F. They can be healthy for the team if a potential IPO is a few years away.
The company has reached a point where the early employee contributions have come to fruition. It’s only fair that they get a share of the outcomes… If the IPO is four years away and the team has been there for 4 years, helping the team get liquidity for their efforts is meaningful” — Rauf, Qatalog
Liked this and want more? You can watch the rest of our Sifted Talks on equity schemes here: