In the growing period of the company, every small business owner has to face one of the most colossal-size challenges in the business world, hiring top-talent. Lower capital and experience in the founder make it difficult for hiring in the initial years.
There is no denying the fact that appropriate fiscal management is the key for the success of any startup or large-sized business.
So, now the real question arises; how do these small business owners face the problem of financing the operations and growth of their businesses? Do they seek outside help by borrowing more money from their friends or asking outside investors for their investment?
The financial management of the business incorporates various factors from how much debt the company is already facing on its financial statements, how comfortable the workers are dealing with the owners, and more importantly, how the company is managing its cash flow.
Let’s paint this picture by taking an example of a famous company Amazon, and how they convince employees to work for them.
A little-known entrepreneur in August 1994, advertised a job listing on Usenet, a pre-web message board. At that time, his business was on the ground, but he was determined to bring more success. So, the first thing that he did was to start looking for talented software developers to “help pioneer commerce on the internet.”
The person was Jeff Bezos, who was taking his first steps towards building Amazon. We all know that Amazon founder Jeff Bezos has been named the wealthiest person in the world with an estimated worth of 131 billion dollars (€115.8 billion), according to Forbes. Well, he is just not the wealthiest person in the world, but he has set a record of having the highest wealth in all of modern history.
Now because of his dedication and persistence, Amazon has grown into such a dominant force that the FTC has now convinced or you can say compelled to ask questions to its rivals about whether they feel crushed by the company.
Let’s have a look at the First Job Listing Jeff Bezos Ever Posted for Amazon 25 Years Ago
In the post, he clearly specifies that being an owner of a well-capitalized startup, he is looking for an extremely talented C/C++/Unix developers who can do well in order to help pioneer commerce on the Internet.
The applicants should have experience designing and building large and complex (yet maintainable) systems. Apart from this, they should be capable of doing the work in about one-third the time that most competent people.
And they should also have a BS, MS, or Ph.D. in Computer Science or the equivalent. Confident, dedicated, and go-getter person with top-notch communication skills would be our first preference.
And if the applicant has familiarity with web servers and HTML then it would be icing on the cake, but still, it is not mandatory for the position. Must be willing to relocate to the Seattle area (we will help cover moving costs).
“Your compensation will include meaningful equity ownership” – Jeff Bezoz marched forth to bring his startup idea into the limelight.
What is Equity Financing?
So, do you have any idea about meaningful equity ownership? Well, it is a kind of compensation given by the Amazon owner to preferred candidates so that they can do his work with more productivity. In short, one-third times higher than the average employees. It is a kind of win-win situation for both the employee and the employer.
What are the common types of Equity Compensation?
Compensation that is based on the equity for employees of any business may take various forms. Here is the list of common types of compensation that includes:
- Restricted Share Units (RSUs)
- Stock Options
- Employee Share Ownership Plan (ESOP)
- Phantom Shares
Advantages of Equity
If the owner has to give some control to the business of other employees, then why did Amazon incorporate this idea to get success for the business? If you are thinking the same thing, then shared below are some ideas for the benefits of having equity for employees:
- Problems of Credit- Are you facing credit problems? If so, equity financing would be the top choice for funds to finance growth. Even though you are being offered with debt financing, the interest may be too high and the payments too steep to be acceptable.
- Less risk- With equity financing, you have to face less risk while enhancing your business. In this case, you don’t have to make any fixed monthly loan payments. So, if you don’t have any positive cash flows during the early months of your business, this can be particularly helpful with your startup business.
- Cash Flow- While offering equity ownership to your employees, it doesn’t mean that you have to take out the funds from your business. The repayment of the debt loan will be taken out from the cash flow of the company, which reduces the money needed to finance growth.
- Long-Term Planning- Equity investors do not expect to receive an immediate return on their investment. They usually work on the long-term term goals, and if somehow the business fails, they also face the possibility of losing their money.
By now, you might have a clear insight into the concept of keeping equity for employees at the forefront of the startup’s strategy.
It has also given us a fair idea about the ideology of the top talent. They do not prefer to leave their comfort zone, and especially for less money, the situation becomes more critical. Therefore, to entice prospective talent to join a startup, you should know how to utilize Stock Option or another form of compensation as a powerful tool.
So, let’s have a closer look at some of the top tips on attracting top talent with stock options or by using forms of stock-based compensation beyond the traditional salary.
Regulate Your Mission
Equity for employees gives a sense of dedication to everyone associated with your startup. This way, you can align the mission of your business to everyone and further encourage them to think more like active owners.
Unquestionably, employees would start focussing more on the future success of your startup rather than the monthly paychecks. In return, it will increase the overall productivity and help your startup to grow at a rapid pace.
Equity for employees fosters a collaborative culture as everyone becomes a partial owner of the company. In short, the value of stock options depends upon the team effort.
Know What You’re Offering
Stock-Based compensation can be two types – stock options and restricted stock. Therefore, it is very critical that you understand the startup structure and then offer one accordingly.
In the initial years of the startup, equity for employees is having a sense of ownership in the company. Thus, it provides an opportunity to share the success of the company directly.
The employee gets the authority to buy stock in the future at a fixed price with stock options. This price is also called the stock’s fair market value as on the grant date.
It is also considered as a powerful employee-retention tool. Notably, a future liquidity event provides all the employees with a meaningful upside gain on the options. Stock options even create the luring incentives for the employees or executives that swiftly drive the growth of the company and increasing its overall value.
Restricted stock is a stock being granted or sold until some decided conditions are met. Otherwise, a stock could become forfeitable and untransferable.
These conditions could be time-based or performance-based.
If an employee would stay with the company for a minimum of four years, it falls under the time-based category. And if the employee has to meet defined goals to become authorized for the stocks, we would categorize it as performance-based.
In case an employee leaves the company before meeting the vesting terms, the company could repurchase the stock or it may be forfeited. Consulting a business advisor can let you take a best decision based on the type of your startup.
Make Clever Offers For Top Talent
Once you have decided on the type of equity for employees, you should try to play smart and determine the portion of the company as a part of the stock incentives. As a founder, you need to be sure that out of the pool you have decided to set aside for those stock incentives, how much would you like to use for critical hires.
It is imperative that the size of this pool of stock you would offer should be agreeable by them. The top hires must have a fair idea about the estimated budget and the way the shares would be allocated and used.
By keeping a proper track record of the numbers & shares, you would be able to strike a precise balance. Further, it helps to achieve employee recruitment and retention goals and shielding the value for existing shareholders at the same time.
Define The Precise Terms For Acquiring Top-Talent
When you would discuss the employee-incentive terms & conditions, you should have a clear vision about some facts like –
- Do you want to treat some employees differently as compared to others?
- Are you aware of what is expected within their market & peer-group?
You might get an answer that certain stock-compensation-savvy employees have their own terms for demanding their stock incentives. As an example, they might seek vesting acceleration on their stock options.
Vesting is the timetable that provides employees with the right to keep their equity incentives. It is much demanded at the time of employees termination or in the case of a company sale.
Therefore, you can use the vesting acceleration as a powerful tool to attract top-talent. It is like a bargaining chip that you could use as a founder of your startup.
The acceleration is mostly provided in exchange for the departing employee agreement, including the statement – “At the time of termination, they agree to release all legal claims against the company.”
Keeping equity for employees or stock-based compensation not only allows you to attract top talent for your startup but also keeps employees focused, motivated, and makes the retention process easy.
This tip is very critical as a responsible owner of your startup. If you wish that your new exciting hirings should be able to assess the value related to stock options, you have to discuss valuation details with them.
Tell them each & every aspect of the equity to give them an impression of a credible company to keep them motivated.
The most relevant time to update employees regarding equities is a financing round. At this time, you can discuss total shares & valuation that further fosters a culture of teamwork & transparency.
In short, keeping equity for employees and continuously informing them about the financial health of your company is a great practice, especially when you are fostering collaboration.
Stock Options is a broader concept, and you could only take the benefit from it, if & only if your employees are educated enough to understand it.
Always arrange sessions for your employees to educate them about the importance of stock options along with the tax-related impact on exercising stock options.
Like Amazon, you can also be able to attract top talent for your startup by offering stock options. Undoubtedly, it is objectively the best option any employee could have for putting a foundation for a bright future.
Amazon’s equity offer for employees proved that it is one of the useful tools to help reward high performers. Being a founder of your startup, you could also provide additional stock options to employees who have got promoted out of their best performance.
It is not only an effective way to give recognition but also to increase the retention rate of the employees. So, get ready to break the sales record of your company and take it to another level.
All in all, if you establish a clear vision & goals for your company, which are later rewarded with the stock options, become more achievable. And, it only happens with the team efforts of your motivated employees.
How May Eqvista Help You?
If you find it a very complicated task to manage stock options or equity for employees, you can rely on Eqvista.
It is a sophisticated equity management software that allows investors, companies, and company shareholders for tracking and managing their equity. So, if you want to make well-informed decisions about your companies’ equity, issue stock, and stay connected with your shareholders, try out the Eqvista App now!
Eqvista platform is crafted to ease the current system for cap tables, share management, and company filings to a high degree and free of any charges.
We would be happy to onboard your Cap Table!