Twitter CEO Jack Dorsey’s recent announcement on giving 1 percent of the company to his employees’ equity pool signals a rising trend among tech startups. Building stock options into compensation packages can be a win-win, because it aligns employees with management and the board of directors.
Empowering your employees with a sense of ownership provides a great incentive to go the extra mile. Partial owners of a company have a vested interest not only in their own performance, but in the long-term success of the whole company. This mindset goes a long way in combating employee churn, helping you to not only attract top talent -- but also to hold onto it. Here are five factors to consider when stock options are on the table.
1. Align your mission.
Providing equity to all employees helps to align everyone with the company’s mission and helps to encourage everyone to think more like active owners instead of passive employees. If employees are focused not only on a paycheck but also the future success of your startup, they’ll be more productive and focused on enhancing the company.
Making everyone a partial owner can boost morale and inspire longevity and career growth within the company. It also fosters a collaborative culture. Because the value of stock options depend less on any one person’s efforts and more on leveraging the entire team to succeed, teamwork is in everyone’s best interest.
2. Provide startup incentive.
Stock options are an important part of total compensation for employees who choose to join a startup. This should be an incredibly useful element used to recruit some of the best and brightest employees, which can add a lot of value to your organization. Stock compensation can also sway a potential employee to choose your company over one that might be offering equal pay but lesser or no stock options.
Communicate your stock options to potential hires, and also be sure to convey that your company mission is aligned around teamwork, collaboration and mutual success. These qualities are often what compel millennials to work at startups rather than larger, more hierarchical companies. Stock options are a good draw, but your company culture could be the determining factor when it comes down to weighing multiple offers.
3. Discuss valuation.
In order for new and existing employees to be able to assess the value related to stock options, it is important to convey key stats related to equity. An appropriate time to update employees can be after a financing round when valuation and total shares can be discussed. This also helps foster a culture of transparency and teamwork. Keeping every employee in the loop about your company’s financial health is a great way to practice what you’re preaching when it comes to fostering collaboration.
4. Educate employees.
Education is important so that employees understand all aspects related to stock options, which includes the tax impact related to exercising stock options. Bring in an equity or tax expert to meet with your employees, so they feel confident in knowing the nitty gritty about how vesting works and how to manage their stock options. An outside perspective will also signal that you’re not trying to convince anyone to take your options, but rather than your options are objectively the best option.
5. Reward performance.
Stock options are also an incredibly useful tool to help reward high performers. Providing additional stock options to employees who have recently been promoted or contributed to a very successful project is a fantastic way to provide recognition and also increase retention of those employees.
Making these incentives team oriented is another great motivator to break sales records, launch a new iteration of your product and so on. Establishing clear goals that are then rewarded with more stock options when they are achieved is a meaningful way to reward hard work while staying true to your company culture.