FIGURES x LEDGY: THE PROS AND CONS OF EQUITY OPTIONS
An equity scheme can connect employees with the company culture and motivate them to succeed – and that’s why they’re about to take off. In our latest webinar, Virgile was joined by Ledgy’s CPO Ben-Elias Brandt to discuss the allocation of equity, and how to get it right.
The growth of equity options
In the UK, Employee Share Schemes have grown by 88% since 2010. But when it comes to accepting, negotiating, or understanding our equity options, we don’t all know where we stand.
According to Virgile, this lack of widespread knowledge is something that’s about to change. “The average engineer in California understands equity better than the average HR manager in Europe. That’s because in the US, a lot of people have been impacted by equity being liquidated – they were part of a company that got sold, or they know someone who was.”
In the US, 49% of S&P 500 companies offer stock options to their employees. So the expectation for equity is stronger in the US than Europe – is this ready to change?
“I think we see the gap closing as more and more companies in Europe roll out equity to their employees – so I’m optimistic about this,” says Virgile. “It is becoming more common that people expect equity but they still don’t demand it.”
Closing the knowledge gap
If you’re ready to introduce an equity scheme, a culture where questions are welcomed is a great foundation. “Companies play a big role in changing the view on this,” said Ben. “I think the important thing is to start communicating options and value. So [at Ledgy] we have an offer where we include all this information – here’s the number; here’s what it could become; so people can make an informed decision.”
Virgile recommends this three-point checklist to make sure your equity options are well-explained:
- Are you confident that people making offers in your company are able to explain the concept and practical terms of equity?
- When you make your offer, are you linking or producing resources so that people can understand equity?
- Do you have a link to a calculator so that people can see what their stock options might be worth in future years?
Promotion and Refresher Grants
Ledgy takes a creative approach to equity – inviting employees to choose how much stake they want, with opportunities to sell it too. “We introduced the possibility that people can trade equity for, say, 15% of their salary so every month they get a small piece of equity,” says Ben. “The interesting thing is if you do it like that, people have to think about it; you’re putting real money on the table. We also ask people if they want to sell their equity during funding rounds – we’ve done that twice so far.”
For many companies, an equity scheme is something that causes some bewilderment and complexity, so it’s sorted out once and then ignored – but Virgile and Ben agree that an equity scheme needs to be tended.
“What about refresher grants? This is becoming a topic because companies are maturing. How do we make sure the person we’re promoting doesn’t end up with less equity than someone we are hiring at that level?”
The themes of choice and participation emerge again. Once you’ve created the resources to share knowledge about equity (and a culture where discussion is invited), you can also support employees by involving them in valuations and projections.
“If you do a funding round as a venture backed start-up and you have a revaluation, that is a great time to share it,” says Ben. “Give people the tools to translate the valuation: what is my equity worth now, versus what it was before…. At the current time the market is unstable and it might be a challenge but generally it’s a good thing to do.”
Equity and compensation: quick questions
Who leads on equity schemes?
HR, finance, or the board – who should take ownership of equity decisions? While the overall strategy (and the equity ‘pool’) should be outlined by finance or the CFO, day-to-day responsibility falls to HR, says Virgile. Training and resources must be dedicated to equity so that all hiring decision-makers can answer questions on this key aspect of compensation.
Can you tell us about any mistakes you’ve made in setting up equity plans?
Ben: “It’s a bit embarrassing but we introduced our new joiner sessions much too late - we assumed that people joining Ledgy already knew about equity but got very strong feedback that this was missing and people wanted more transparency.
“At the beginning we were doing financing rounds and I would have pushed for a slightly bigger pool because of dilution. We hired more people without increasing the pool but we probably should have – this made us a bit tight in terms of what we had available, so I think that was a mistake.”
Should you give equity to everyone from the outset?
“It can unite the whole team behind the mission, so making it a foundational principle is a goal,” says Ben. “Give it to everyone, but only if you feel confident that you’re going to nail the communication,” says Virgile. “Define your equity model early on. There’s a tonne of ways to think about it, but the funders should align on this.”
Cash-strapped start-ups can use equity shares to entice the most ambitious people and this strategy can be hugely successful, says Ben. “The earlier you are, the more you attract entrepreneurial people; you’re more likely to get people who understand equity.”
What is the average pool size for employee equity and how should it develop over time?
“A good rule of thumb is 10% at the beginning and then you increase it with funding rounds by 5–10%,” says Ben. “I think in the US, at liquidity events, in the long run, it’s something like 20-25% of the company [is owned by employees].”
What is the future for equity schemes in Europe?
“When I talk to Swedish people, they value equity more because of Spotify [which famously offers a compensation package including shares],” adds Ben. “I think having those examples plays a big role, and we will have more of that.”
“We need to have more liquidity events, we need more IPOs, more successful exits. More companies being better at managing equity, using an equity management system – we hope that more companies will use Ledgy to create a good equity benchmark,” says Virgile.
Looking to the future
In a live poll of webinar attendees, more than 50% of respondents said that their teams do not understand the basics of equity and share ownership very well. This sums up the project that European companies have ahead of them: educating people in why equity matters, and making sure that equity plans give people the flexibility and insights they need to feel that their share options really matter.
With best practices and first principles outlined more clearly across geographies and markets, companies will be able to use equity to incentivize and align the team behind one core goal. If you want to get all the details about how to set up equity in your company, you can watch, or rewatch this webinar!
If you’re ready to incorporate equity options in your compensation package, Figures can help! Benchmarking against other companies in your industry and across Europe gives you a broader view and helps to make your offer more competitive. Get started with the Figures demo for a snapshot of the data available to you.