Frederik Mijnhardt is the CEO of Secfi, an equity-planning platform for startup executives and employees.
The tables have turned in the job market, and employees have the upper hand. According to McKinsey, 40% of employees said there’s a high likelihood they’ll leave their job in the next three to six months — all part of the “Great Resignation.” Startups are struggling when it comes to attracting talent and retaining employees.
To stand out from the competition, startups need to get creative — especially as remote and hybrid work models render in-office perks less relevant. The pandemic has allowed employees to reassess their careers, and many have decided they want to feel valued. McKinsey found that the top reasons employees left their jobs were because they didn’t feel valued by the organization, had an issue with their manager or didn’t feel a sense of belonging at work.
Startup founders and people teams should reevaluate their employees’ equity compensation — not in terms of increasing it but rather helping employees understand it.
Stock options should be a motivator, a way for employees to own a piece of what they’ve built. However, if employees don’t truly understand the value, those options won’t translate into motivation. That’s why executives need to view their employees as their earliest investors. After all, they’re investing their time and energy to build something great.
1. A better understanding of company fundamentals can make employees feel valued.
When employees feel valued at work, they have a strong sense of belonging. Companies can fuel this by providing competitive compensation, rewarding high-performers, being open to flexible work arrangements, creating more equity among diverse populations, being radically transparent and educating employees.
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However, a big part of making employees feel valued is letting them in on future plans.
Saying you’re going to IPO next year has become a cliche and is a major reason employees don’t value their equity. Startups are taking longer to exit (in 1999, it took companies roughly four and a half years to go public; in 2018, the average was 12 years), yet employees typically leave after only a few years.
Leaders need to trust employees with information on future plans. To them, promises that you’ll eventually IPO or get acquired won’t sound concrete. Because of this, another offer may sound more attractive, as it might offer a salary, title or role that serves an employee’s immediate needs.
2. Lack of transparency and communication can cause real business concerns.
Companies that want to make their employees feel valued need to be transparent. Vague promises can not only make employees confused, but they can also create bad press and even impact the bottom line.
For example, BuzzFeed’s SPAC issues highlighted the ramifications of leaving employees in the dark. By neglecting to clearly communicate with employees about their equity around an IPO, ex-employees found themselves unable to sell their sinking shares.
Unclear communication can have a negative impact on morale and real business ramifications. The layoffs and premature rollout of severance checks at Better.com not only significantly impacted employee morale but also the overall perception of the business.
3. Treating employees like investors can build a strong company culture for hiring and retention.
Hiring and retention are top challenges for companies of all kinds right now, and leaders are scrambling to figure out how to get people to join — and then stay.
If you go above and beyond to explain equity when you make an offer (or start an education program at any point), it can show that you value your employees. Educating them can show them that you want them to fully understand their compensation package so they can make a plan and make the best possible financial decisions. By providing your team with the resources they need, you’re indicating that you have the kind of employee-first culture mentality that talent wants right now.
Employees should be treated similarly to investors because exercising is deciding to invest financially in the company. We can look to employee exercise rates to potentially determine how educated employees are about exercising equity as well as how confident they are in a company’s future. In a recent report, we found that “at some companies, employees exercised more than 75% of their vested stock options pre-exit. At others, as few as 2% exercised their stock options before their company exited publicly.”
If you want existing employees to stay at your company and want to encourage existing ones to join, you need more than vague promises. Show your employees the path and educate them about their options.
Taking care of employees means protecting them from financial risk.
Exercising stock options is always a risk. It’s the job of a founder to be bullish, but employees are not privy to the same information that’s available to founders, board members and investors. Company leaders should help employees understand the risk and also provide education so that employees can better protect themselves.
Equity is also complicated, and many may not understand that they not only have to pay a substantial amount to exercise but that they need to navigate complicated tax structures — not to mention how to understand risk and put a plan in place to minimize tax and maximize the reward.
Exercising options early can give employees an option to save substantially. We found that:
• “Employees at companies that went public in 2021 saved nearly $415,000, on average, by exercising before an IPO.”
• “In 2021, employees working at U.S.-based, VC-backed startups that went public paid an estimated $11 billion in extra taxes because they waited to exercise their stock options post-exit.”
• “The cost to exercise can grow 3,360% between seed and Series C.”
Most wait until they believe an exit is guaranteed, but that’s when the cost can become insurmountable and can lead to golden handcuffs. It’s also when employees could be at the most financial risk if the worst happens — their company fails, or their post-IPO is underwater.
What to do with their stock options is their decision, but you should provide them with as much information as possible to help them make the best choice.