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What Founders Need to Know About Employee Equity As your company grows, offering an employee equity plan can be a strategic way to attract and retain top talent while managing cash flow.
There's a lot for founders to consider as their companies grow. Among the most important things are hiring and retaining top talent. A growing business—especially one that potentially has a goal of going public someday—needs a team that is fully dedicated to the company's mission.
How do fast-growing companies hire A-players and retain them, as well as the employees who have been on board since the start? One smart way is via an equity stock plan. These plans allow employers to pass along incentives to employees in the form of stock units in the company, as well as other non-cash ownership stakes, based on their employment, performance, and tenure.
As a hiring tool, equity stock plans can be attractive to employees because they provide the person with a vested interest in the company's growth, as the money they earn from the plan is dependent on the business meeting or exceeding its fiscal goals. As such, these plans can provide outstanding future value that helps achieve an employee's larger financial goals.
For employers, offering an equity stock can help keep employees aligned with the company's goals without having to outlay cash in the form of bonuses. This can be especially beneficial for companies that are mindful of their cash flow while trying to build up the organization.
For the uninitiated, offering employees equity in your business can seem like a daunting prospect. But when executed strategically, this type of compensation plan can be a smart move. Here's what founders should know about offering employee equity.
Keep it simple right from the start.
When done right, an employee equity plan rewards employees and serves as a selling point for founders to attract the best talent. If the plan is so complicated that it can't be communicated clearly to employees, then there's a problem.
"Depending on how broad-based your granting practices are, employees tend to not fully understand the equity awards that they've been given and adopting an overly complicated plan can make it that much more unclear for the participant," says Matt Hiler, Vice President and Solutions Architect at Fidelity. "If they don't understand the value that you are creating for them, they don't always see what they may be giving up if they were to seek employment elsewhere, so the equity plan can start to lose its very purpose."
Use the right tools to keep tabs on finances.
Founders and their financial managers should make sure that all their information is accurate and auditable. "If you're still using Excel spreadsheets to manage and track equity, get yourself a software provider to help manage your Capitalization Table (CapTable) ASAP," says Carl Stegman, Private Company Practice Lead, Stock Plan Services, at Fidelity.
Founders and their financial managers need to keep tabs on who owns what class of shares, how much they own, as well as the other types of financing that has helped fund the business. "You do not want to find yourself in a situation where there's accounting errors, missing board approvals, documents stored in various computers across your company, or grants and certificates not accounted for," Stegman says. "Because this data is quite literally the ownership of your company, you want it to be as accurate as possible and the best way to do that is by using an automated cap table to help you do just that."
Get the details right.
To make sure an employee equity plan is structured in a way that helps a business reach its goals, working with a trusted provider like Fidelity can make the process less stressful for founders.
"If the goal is to eventually have a public offering event, you really should be conscious of how much equity you might've offered and how things like tax funding and collection could quickly start to have an impact on your publicly traded stock," says Mario Mazzaro, Vice President and Client Service Manager Team Leader at Fidelity. "I think using Fidelity to learn from other clients on their successes and failures is very important."
"At Fidelity, we want to offer what we see as best practices and help you make informed decisions on how plan design would not only affect your experience as a plan sponsor, but your participants' experience as well," Hiler adds. "And with dedicated support for participant communications, you can be confident that your participants will be supported and appreciate the value that you are creating for them."
Keep employees in-the-know.
Once an employee equity stock plan is set, the next step is to communicate how it works with staff. Employers also need to communicate changes should they arise.
"Continually educate your employees on the functionality of your equity plans into simple terms," Hiler advises. "When developing your plans, be sure to consult your equity administrator on what they can support systematically and how it will affect the participant experience."
Providing resources for employees to "better understand the benefit of the equity they have been granted helps to ensure that they are recognizing its value," says Stephanie Brown, Vice President of Implementation at Fidelity. "Fidelity has a participant experience that can help with custom communications and education programs so that your employees take the right actions and maximize their awards."
Click here for more information about Fidelity and how they can help your business create an employee equity plan that sets you and your employees up for long-term success.
"What Founders Need to Know About Employee Equity " is reprinted from Entrepreneur, May 2022, as part of a paid advertisement by Fidelity Stock Plan Services, LLC. The statements and opinions expressed in this article are based on insights provided by Fidelity but modified by the author. Fidelity Stock Plan Services, LLC cannot guarantee the accuracy or completeness of those modifications.
Information is provided for educational purposes only.