It’s not uncommon for startups to offer equity or stock options as part of an employee’s compensation package. But for newcomers to the startup world, whether they're transitioning from other industries or just entering the workforce, equity can be confusing.
Why would a company offer it? What does it even mean? We had four Colorado companies share their perspectives on offering equity to their employees.
Denver-based Fluid created an online marketplace where users can lend or borrow items for a set price. James Eberhard, Fluid’s co-founder, shared his thoughts on offering equity to his employees.
What does it mean to offer equity?
Equity means you all win together. If the company does well, the founders, investors and employees all share in the success.
At Fluid, what are the advantages for the employees?
They get an opportunity to participate in the financial success of the company.
What are the advantages for the company?
It financially aligns the employees, founders and company together. It helps to make employees think more as investors and owners. Most importantly, it helps the company conserve cash.
What advice do you have for early-stage startups considering offering equity?
One, teach your employees about how equity and capital works. When employees receive equity in lieu of cash, they are investing in the company. Not only does this teach them how to be smart investors in business, it also helps to raise drive and focus across the company.
Two, understand the tax aspects of equity so when you are successful, your team can efficiently realize the return.
We spoke with Kristie Hunziker, director of people operations at Denver-based API integration platform Cloud Elements, about their equity program.
What does it mean to offer equity?
By offering equity as a perk, we’re giving our employees part ownership, sharing the responsibility to create a successful company. It means we are optimistic and committed to reaching our goals as a team and want those who join the us to feel and act like owners. This is how we live the Freedom, Flexibility and Responsibility core value, being part owners of a company meaning driving the excitement and motivation as a team.
What are the advantages for Cloud Elements employees?
One advantage of offering equity to our employees is a feeling of being connected to the success of the company and their co-workers. Equity provides motivation to go above and beyond, to make an impact and, of course, future financial gains.
What are the advantages for the company?
Stock options are an inexpensive perk for a company to offer, especially for early stage companies.
What advice do you have for early-stage startups considering offering equity?
Be sure to get an understanding from your team members what equity means to them. Sometimes, someone will join a startup and agree to a lower salary in exchange for additional stock options because the potential value of the stock is a motivating factor for them. Others may value a higher salary, which may not be suited for a tightly funded startup.
Set expectations and communicate your compensation philosophy early in the interview process so you are not surprised when your new hire asks for a hefty raise six months into their tenure with you, and they in turn are not disappointed if you only offer a small raise with additional equity.
Maxwell Financial Labs is growing their team, and the Boulder fintech company’s co-founder and CEO, John Paasonen, had some thoughts to share about equity.
What does it mean to offer equity?
We see it as a core component of our employees' compensation. As a seed stage startup, we know that value will be created over many years. Our early employees will play an outsized role in creating that value, so we believe it's their right to share in that upside.
As a founder (and fellow shareholder), I want them highly motivated to create that value along with me. Our investors believe this as well — during our last round we created a sizable options pool for our early employees. If we're successful, I want them to be winners.
What are the advantages for your employees?
The clear advantage is that if we're successful in our venture, they will own a very meaningful asset. Longer term, they carry this with them — potentially because they don't need to work for someone else, or they're recognized for having been part of a team that has built a big success, and that will create more opportunities down the road to start something and get funded.
Of course, that's all in the future. Ultimately, in the here and now of building a company, equity is part of creating a culture of shared effort and camaraderie.
What are the advantages for the company?
Providing equity to employees gives the company advantages on the other side of the same coin: employees that are owners behave as such, putting their all into making the company a success and generating value. The startup life is full of ups and downs, and honestly, often we can't afford to pay market rate for skills.
We need highly qualified, agile women and men to accelerate our progress. They need to be men and women motivated not by immediate gratification but by the long-term gain of hard work. They'll be part of a team of hardworking peers that will collectively achieve the outcome we all imagine.
What advice do you have for early-stage startups considering offering equity?
Sam Altman from Y Combinator wrote a great piece on early employee equity that I encourage other founders to read. Too many founders give their earliest employees too little equity. These are the people on whom the company will be built and are taking a risk by joining the team. They should be compensated as such.
Joel Milton, co-founder and CEO of the Denver-based “Salesforce for cannabis,” Baker Technologies, opened up about the company’s equity packages.
What does it mean to offer equity?
It’s a significant part of our compensation package that’s directly tied to our corporate culture. When everyone is working towards a common goal (the success of the company) you get a special team chemistry you don’t see when everyone is working towards their own (personal) goals.
What are the advantages for Baker’s employees?
Employees know that they are able to benefit personally from all of the hard work they are pouring into the company, which makes it really motivating and exciting to be a part of the growth of the organization. Financially, it means employees have “upside” — earning potential beyond their annual salary.
What are the advantages for the company?
As a founder, I love knowing that employees feel they are a meaningful part of the company. The goal is that people are more excited to be working for an organization where they have some skin in the game; instead of just thinking about their personal success, their incentives are also aligned with the success of the company.
Equity is also a great way to attract top talent; many employees look for opportunities that offer equity as part of the compensation package. When you’re looking to attract senior employees you can’t afford, equity is a great incentive. In fact, the only reason we were able to get our VP of Sales to join (at the salary we could afford) is because we offered her equity to supplement the cash component.
What advice do you have for early-stage startups considering offering equity?
Make sure you talk to your lawyer about the details (strike price, vesting schedule, etc.) and you are careful with all of your paperwork (board consent, NSO vs ISO docs) — the last thing you want is for future investors to be hesitant to invest because there are issues with your cap table.
It’s also really important to make sure you educate your employees on the details and benefits of the equity they are granted — equity is a finite resource, and it’s important that both founders and employees fully understand that!
Photos via featured companies. Responses have been edited for length and clarity.
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