Three Things To Keep In Mind When Granting Equity To Employees

Posted by BodeTree on May 17 2017

Part of the appeal of working at a startup or emerging company is the ability to earn equity and become an owner.

It's this ownership mentality that drives startup employees to work harder, longer, and smarter than their corporate counterparts. When everyone is invested, teams can move mountains.

 With that being said, dealing with startup equity grants can be precarious. Not every employee grasps the value of equity, and not every startup is a path to quick millions. All in all, it's easier to get the equity portion of startup employee compensation wrong than it is to get it right.

 Over the past few years at BodeTree, I've had to spend more time thinking about equity plans for our team members and what it means for the organization. I've come to a few key conclusions that I believe will be valuable to any entrepreneur grappling with the topic of equity participation. 

Beware companies that hand out options too freely

Despite their ability to change the lives of employees for the better, I've learned that options should still be subjected to a healthy level of skepticism and scrutiny. Companies that hand out options too freely, or in lieu of reasonable cash compensation are likely in dire straits or woefully naive.

One thing I’ve learned about employee compensation is that you always have to have room for people to grow. It doesn’t matter if you’re dealing with your newest intern or a key executive. As soon as people feel like there is no room to grow and earn more, they stagnate.

Founders who give away too many options early on box themselves into a corner, so to speak. Without room to expand and grant more down the road, they inadvertently de-incentivize their team members, leading to problems in the long-term.

Stock options or other forms of equity compensation represent a bond of trust, especially at small startup firms. There must be equal buy-in on both sides of the equation, and leaders should always be sure to keep their powder dry so that they keep employees motivated and optimistic about the future.

Balance is key

 As with most things in life, the best approach when dealing with equity compensation is a balanced one. For leaders, it's important be generous without being egregious or stupid. For employees, the key is to find a balance between immediate cash compensation and the potential for a long-term upside.

At the end of the day, nothing beats a well-thought-out and documented equity compensation plan that takes all of these factors into consideration. There are no do-overs when it comes to sharing the equity of your business, so make sure you do everything in your power to get it right the first time.

The best thing a leader can do is create wealth for others

When you're a small company, every member of the team is additive. When you're a company of five, ten, or even twenty, every interaction and decision impacts the culture of the firm and, ultimately, it's future. As a result, the performance expectations for early employees are incredibly high.

When you couple these often difficult performance benchmarks with the fact that any equity grant dilutes the ownership of the founders and investors, it becomes easy to see why leaders tend to be stingy with options.

However, I believe that the ability to cultivate a high-performing team and willingly share equity is a hallmark of mature leadership. One of my mentors (who happens to be a board member here at BodeTree), was until recently the CFO of a major national wireless carrier and has enjoyed a long and varied career.

When I asked him about what career achievement he is most proud of, he responded that it was when a custodian at former job thanked him for the work he had done in preparing the company's employee stock ownership plan. That plan, and the company's subsequent IPO, enabled the custodian to put all of his children through college, which until that time had seemed like an unattainable dream.

My mentor's response resonated with me on a personal level, and helped me to realize the power that equity participation can have on the lives of our team members. This realization inspired me to think more deeply about how my organization handles equity compensation and strive to create wealth for the team.

Tags: Decision Making, Helpful Insights

BodeTree

Written by BodeTree

BodeTree’s mission is to bring transparency and modern thinking to the world of franchising. We help both franchisors and franchisees grow and manage their businesses throughout their entire lifecycle with our unique mix of professional services, technology solutions, and venture investment.