During a recent presentation I did for industry professionals, an attendee claimed that his employees didn't need additional education on their equity compensation because they worked in tech and "already understood” these plans. I pointed out that he was mistaken. I stated that most, and perhaps nearly all, employees misunderstand, or do not even try and understand, their stock-based compensation. This is especially true for startups.
Check out a site like Quora, or attend a Technology or Human Resources conference. The questions about stock options, restricted stock units, dilution, values, taxation and more are wide-ranging and numerous. For almost 30 years, equity compensation and startups have been a ubiquitous combination. This long-term relationship has lead us to believe that people not only value equity, but they also understand its value. They don’t.
Stock options became popular before internet browsers existed for ordinary people. And, like the internet, stock options are a mystery to nearly everyone who benefits from them. Are they a series of tubes*? Did Al Gore invent them? Why is there a vesting schedule? Why is it always four years? (It’s not.) Are they better than cash and most importantly, when will they make you a millionaire?
If you are granting equity prepare for this simple fact: Your staff will not “get” how their awards work if you don't take the time to educate them. For many companies, this is part of a weird secret goal. If people don't understand their equity, then they are free to invent whatever cockamamie value they wish. People motivating themselves on a dream is sweet for a while, but the truth always makes itself known eventually.
If your staff doesn't understand their equity, then you are probably going through a lot of pain for very little gain. Equity compensation beyond Series A usually requires convincing your investors to accept additional dilution. If your company is like most, by the time your company has an IPO or is acquired, these requests for shares can become battles that stall far more important strategic and tactical decisions. If the return on your equity compensation is random or the value is not understood, then you may be fighting for nothing.
Equity compensation is likely the most complicated way for an average employee to make money. That being said, it is not difficult to ensure that your staff understands, at the minimum, the following:
- How their grants work (basic features, timing, mechanics, and risks)
- Why equity is used (in addition to, or instead of, cash)
- How to determine a potential value of an award
- The workings of the value exchange between investors, founders, management and employees
No matter how vanilla your plan is, no matter how many other startups your employees have worked for, they don't get it. Not without help. Not without facts. Not without reminders. And, not without effort. If you haven't already started your education process, the time to start is now. If you're not sure where to start, ask in the comments, and I will gladly point the way.
*Sen. Ted Stevens – Alaska
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several industry resources including the recent Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.