In the war for talent, equity compensation has become more important than ever, but it’s not the easiest concept to explain, especially in privately funded companies.
Equity isn’t a new concept. Public and private companies have been using stock options (or RSUs) to recruit, motivate and retain talent for decades. However, equity compensation has grown in importance when it comes to hiring, retaining and aligning incentives across all employees, not just senior executives.
This is happening for a few reasons:
- A global shortage of skilled tech workers: Candidates with in-demand skills are now getting multiple offers and can practically name their price. That price, more often than not these days, includes some kind of equity component.
- Wage inflation: The labor shortage and market dynamics are causing significant wage inflation. Companies are looking for ways to increase total compensation while reserving cash. Equity is one way to do this.
- A growing focus on private valuations: The number of companies reaching unicorn status is increasing. According to CB Insights, over 900 companies globally have achieved unicorn status, and 2021 alone minted more than 450 unicorns, up from the previous high-water mark of 111 in 2019.
- Transparency around compensation: Compensation data is accessible. Historically, companies like Glassdoor have provided robust salary data for more mature organizations. Now, companies like AngelList provide both salary and equity benchmarking for startups.
- Expectations: More than half (53%) of millennials say equity compensation was the main reason or one of the main reasons they took their job.
Leaders need to get better at understanding and articulating not just why equity is important but also how it’s determined. So let’s start at the beginning.
An ownership mentality is good for both business and morale, which is why many founders choose to allocate some level of equity (even a small piece) beyond leadership roles. Leaders may have the vision, but they need a team to execute and concretize their ideas.
Think strategically, think ahead, and communicate — make sure you’re offering the right equity allocation, for the right strategic reasons, and to achieve the right goals.
Designing your equity program
Once you’ve decided stock options are going to be a component of your total rewards package, it’s time to define your philosophy and design your equity program.
Sizing the equity pool
First, you’ll need to determine the size of your employee option pool. You will want to formulate your thoughts prior to discussions with investors, who may require the creation of a larger option pool than is necessary if your proposed pool is disconnected from your hiring plan.