Kevin Dowd’s Post

Founders - here's a benchmark of equity given to employees. 📊 (but first let's explain this graph 👇) This graph from Peter Walker shows equity grants to employees sorted by when they joined and comparing 2022 vs 2023. 𝐁𝐮𝐭 𝐰𝐡𝐚𝐭 𝐢𝐬 𝐚𝐧 𝐞𝐪𝐮𝐢𝐭𝐲 𝐠𝐫𝐚𝐧𝐭? ⤷ It's a non-cash compensation given to an employee where this person receives a percentage, now or in the future, of ownership in the company. A startup is usually short on cash. As such, equity is a great way to compensate employees without impacting cash-flows. Grants may come in various forms but the most common is a Restricted Stock Unit (RSU) that requires employees to achieve certain milestones – such as years of service – to earn the stock. 𝐍𝐨𝐰 𝐰𝐡𝐚𝐭 𝐝𝐨𝐞𝐬 𝐭𝐡𝐞 𝐠𝐫𝐚𝐩𝐡 𝐭𝐞𝐥𝐥 𝐮𝐬? Here we can see the average percentage of ownership given to employees. Let's focus on 2023. Average Benchmark for 2023: Hire 1: 1.00% Hire 2: 0.75% Hire 3: 0.50% Hire 4: 0.42% Hire 5: 0.31% It's interesting to see the drop between hire 1 and 10. And that's something that founders should bear in mind when they recruit new employees. They won't all be treated equal and as such the conversations might feel different. In general, allocating equity is a tool to: ⤷ bring in great talent in your early days ⤷ retain employees and reduce attrition ⤷ boost profits and motivation in the company ⤷ create alignment between founders, shareholders and employees The key here is to find a balance between giving enough to attract and retain talent while also having enough left for advisors and investors. 🔔 Follow me (Hugo Rauch) and join a community of startups addicts 📰 Subscribe to my newsletter at the link below my name

For about two years, employees were gradually growing less and less likely to exercise their vested stock options. In November 2021, employees on Carta opted to exercise 58% of vested, in-the-money equity grants; by November 2023, that rate had fallen to 30%. Employee exercise rate can be an interesting proxy index for the startup market as a whole. When valuations are rising, employees are more likely to exercise their options, because those options are theoretically more valuable and thus more appealing. When valuations are declining, options aren't so tantalizing. Under this framework, the end of 2023 and the start of 2024 brought some promising data. The employee exercise rate increased in both December and January, rising to 34%. That's a modest increase. But given recent trends in startup valuations—the median valuation on Carta increased at five out of six startup stages in Q4 2023—it could be a sign of good things to come.

90% of startups fail. Why then, should an employee take a paycut in exchange for share - or rather share options? I have worked with many startups and only 2 made the share option deal worth it (e.g I was able to purchase my share and benefit from the startup’s success. Yet, most founders I have worked with are baffled that team members, even the early joiners, are not as driven as they are. Equity can be, as one of them puts it: ‘life-changing money.’ Yet 90% of the time it will amount to nothing. Now put yourself in the individual’s shoes: ✅ They join a business that is exciting with great career opportunities ✅They get share options, which is an opportunity for great profit ✅The business mission is exciting and they will have the opportunity to transform their industry ⛔ They take a pay cut because the company is still early stage ⛔ The salary they are on is often not enough for them to be able to purchase their options when the time comes. Overall, it sounds exciting and interesting, yet the reality is vastly different: - Employees who choose a lower salary might find it unsustainable in the long term since pay rises are never guaranteed. Founders need to empathize with this financial insecurity and align salaries with the market as much as possible or they will lose talent. - Share options are not cash in hand. Employees need to understand the intricacies of vesting schedules, exit scenarios, and strike prices.... Founders should provide education on what equity means, how it works, and the realistic scenarios under which it can become valuable. - Not everyone is driven by potential financial wins. It goes back to having a sense of purpose, autonomy and mastery (Dan Pink, Drive) which enables job satisfaction. Cultivate a culture that values and recognizes contributions, aligns personal and company goals, and enables a supportive work environment. - Ensure that employees see a clear path to success, both for the company and themselves. Regularly communicate the company’s progress, challenges, and strategies. Involve employees in the journey and make them feel essential to its success. This will build trust and commitment. While equity can be a powerful incentive, it should complement a fair base salary and benefits package. This balance helps mitigate the financial risk employees take on and demonstrates the founder's commitment to valuing their team’s current contributions, not just future potentials. Put your people first, they will take care of your customers. For startup founders looking to attract and retain top talent, it's essential to balance the potential of equity with the need for financial stability and personal growth. It might feel like yet another thing to juggle, yet offering a balanced compensation package, providing clear education on equity, and fostering an engaging culture, will help you create an environment where employees feel valued and excited to contribute to the company's success.

The Equity Equation: A Guide to Giving Up Company Shares 😐 When founders give up equity in their startup tо investors оr employees, іt should always make the company more valuable. A simple equation can help determine how much more valuable the company needs tо become tо justify giving up a certain percentage оf equity: 1/(1 - n), where n іs the fraction оf the company being given up. ➡️ For example, іf a founder gives up 50% оf their company (n = 0.5), the company’s average outcome needs tо more than double (1/(1 - 0.5) = 2) for the deal tо be worthwhile. ➡️ When taking investment from a VC firm, giving up a significant chunk оf equity can be a great deal іf the VC’s involvement can improve the company’s outcome by more than the equation suggests. ➡️ When hiring employees, the equation works іn the opposite direction. The amount оf equity (n) tо give a new hire іs (і - 1)/i, where і іs the expected increase іn the company’s outcome. Salary and overhead should also be factored іn by multiplying the annual cost by 1.5. 🐦Ultimately, founders should always feel richer after trading equity. If giving up equity doesn’t increase the value оf the remaining shares enough, it’s not a good deal.

Is Equity compensation enough to keep you? I have spoken to many candidates recently who certainly see this as a factor for consideration... HOWEVER.... in my opinion, and many I can imagine, Equity alone is just one piece of the puzzle. What else matters? Company culture ✨ Career growth opportunities 🚀 Work-life balance ⚖️ Job satisfaction 😊 Feeling included 🙌 Feeling your voice is HEARD 🗣 Healthy communication ❤️ Attractive parental benefits 🚸 and many more.... While Equity can be a compelling incentive, a supportive and inclusive company culture, along with opportunities for personal and professional development, are often what truly fosters loyalty and engagement among employees. What's your take? Join our conversation in our latest post ⬇ Alderson James #EquityCompensation #CompanyCulture #EmployeeRetention

Is Equity compensation a dying benefit? 🤔   Start-ups have typically turned to Equity compensation as a strategic tool for employee retention.   Often in the form of stock options or grants, Equity compensation has been thought to align an employee’s interests with the company's success, transforming them into stakeholder with a vested interest in its growth.   However...according to the Financial Times, as a result of economic downturns and challenging market conditions, Tech Start-ups are beginning to reduce the amount of Equity they offer to new employees as part of their compensation packages... ...people who are now going to work at Start-ups are receiving 37% less Equity in their companies on average compared with 18 months ago. And now, it's reported that employees are placing higher importance on receiving increased cash salaries rather than Equity.   💡 These new developments will be pivotal in the forward planning of designing competitive and attractive compensation packages.   What do you think...? 💭 Is Equity compensation indeed a dying benefit? 💭 Do you prefer prioritizing cash salaries over Equity compensation? We want to hear your thoughts! ⬇ #startups #talentacquisition #cashvsequity #compensation #talentattraction  

Offering startup equity to employees is a common practice, and it comes with both advantages and disadvantages. Here are the pros and cons: Pros: ✅ Alignment of Interests: Employees with equity have a vested interest in the success of the company. When the company performs well, employees benefit financially, aligning their goals with the company's success. ✅ Motivation and Loyalty: Equity can serve as a powerful motivator, encouraging employees to work towards the company's long-term success. It can also foster loyalty, as employees may be more inclined to stay with the company to see their equity vested. ✅ Attracting Top Talent: Offering equity can make a startup more attractive to top talent, especially when competing with larger, more established companies. It provides a potential financial upside that salary alone might not offer. ✅ Cash Conservation: Startups often have limited cash flow. Offering equity allows them to compensate employees without a significant immediate cash outlay. ✅ Employee Ownership Culture: Equity ownership fosters a sense of ownership and a shared commitment to the company's success. Employees may feel a stronger connection to the organization. Cons: ❌ Dilution of Ownership: As more equity is distributed to employees, the ownership stake of the founders and early investors gets diluted. This may lead to a loss of control for the original stakeholders. ❌ Administrative Complexity: Managing equity plans can be administratively complex. It involves tracking grants, vesting schedules, and potential changes in valuation, requiring careful administration and communication. ❌ Valuation Challenges: Valuing a startup can be challenging, especially in the early stages. Discrepancies between perceived and actual value can lead to misunderstandings and dissatisfaction among employees. ❌ Lack of Liquidity: Employees may hold equity for an extended period without the ability to sell or cash in until a liquidity event such as an IPO or acquisition occurs. This can be frustrating for employees who want to realize the value of their equity. ❌ Mismatched Expectations: There may be a mismatch between employees' expectations and the actual value of the equity. If the company doesn't perform as anticipated, employees may be disappointed with the financial outcome. Before implementing an equity program, startups should carefully consider their unique situation, communicate transparently with employees, and seek legal and financial advice to structure equity plans effectively. #Equity #Startup

When starting a company, often the question comes up about equity. Should you attract top talent with this? And if so, what equity share do you make available for your employees? #Sifted shared some light on this with an exciting read. See below. https://lnkd.in/e8i9R6dB

Key takeaways from the "State of Startup Compensation, H1 2023" report: 💡 Fundraising Chill Impact: The decline in startup fundraising has had significant effects on startup employee compensation. Startups collectively raised $28 billion in the first half of 2023, less than half of what was raised in the last quarter of 2021. 💡 Reduced Spending and Headcount: To extend their runways, startups have been cutting costs, resulting in headcount reductions. Many VC-backed startups have laid off tens of thousands of employees in 2023, leading to minimal salary growth and stagnant equity packages. 💡 Hiring Slowdown: The pace of hiring in startups has sharply declined, with only 129,000 employees hired in the first half of 2023 compared to 314,000 in the same period in 2022. 💡 Salary Stagnation: Employee salaries remained flat, with a 0.3% decline in Carta Total Compensation benchmarks from November 2022 to May 2023. 💡 Equity Reductions: Average equity grants benchmarks decreased by 26% between November 2022 and May 2023, impacting all levels of employees, particularly junior managers. 💡 Employee Tenure: Most startup employees have low tenure, with 64% having been with the company for under two years. Higher-valuation startups tend to have longer-tenured employees. 💡 Salary Trends: Salaries have stagnated or declined across different job functions and seniority levels due to reduced new hire offers. 💡 Equity Trends: Equity packages have significantly reduced, partly due to a shift in negotiating power back to startups and scarcer funding rounds. The decline affects employees across various roles. 💡 Decreased Equity Exercise: Employees are less eager to exercise vested equity grants, with only 28% being exercised before expiring in August. 💡 Localization of Compensation: Startups are still localizing compensation, with 84% adjusting pay based on location. However, they remain open to hiring candidates from different states. 💡 Compensation by Location: Compensation for startup employees is drifting towards San Francisco levels across various U.S. cities, with Tier 4 cities experiencing the most rapid growth. The report highlights the challenges startups face in the current economic environment, with reduced funding, reduced hiring, and declining compensation packages. #startupsalaries #compensation #startupreport #carta