The amount of value creation in private tech markets over the last 30 years has attracted more and more capital, slowly switching leverage from investors to companies, and specifically to their founders. Funding terms became more founder-friendly, and I believe the next wave of development will bring employee-friendly terms.
Founders have fought to keep control of their companies, feeling that they’re the ones who are better suited to take decisions that positively impact long-term value creation. Those same founders realize it's the people they hire that build the business, and they are ready to bend market forces to attract and retain the best employees.
It has now become common in Europe for startups to pay (all) employees with both cash & shares, yet many things remain to be done:
Education: employees in Europe need a much deeper understanding of what equity is, the tools companies use to incentivize them, and when equity starts having real value. Only then will startups be able to attract the very best talent.
Best practices: the amount of shares to allocate to your employees, vesting schedules, exercise periods, strike prices, liquidity windows still need to become widely shared across the industry. But the path is there: we have come a long way with forward-looking companies incentivizing 100% of their workforce, making equity an integral part of yearly pay, applying standard 4-year vestings, using discounted strike price methodologies for common stock, giving employees longer exercise periods, and sometimes offering multiple liquidity events.
Lobbying: allocating shares to employees is often a cumbersome, complex, tax-heavy process in Europe, especially when incentivizing employees across different geographies. #notoptional has done a great job bringing the issue into focus.
Infrastructure: managing employee stock option plans, answering financial questions, and delivering on liquidity promises are all still hard for companies. The right tools are being built as we speak.
Incentivizing employees with equity has positive long-term impacts on the business and negative short-term impacts on shareholder ownership. Correctly aiming at the long-term requires strong leadership.
We’re seeing successful companies grow beyond their dependency on primary rounds when it comes to employee ownership, implementing the right frameworks to grow over the long term:
New yearly ESOP plans. Instead of issuing new unallocated shares with each fundraising round, companies issue 3-5% every year to incentivize their employees, which is in line with global benchmarks at places like Amazon or Stripe.
Equity as an integral part of pay. Often employees get yearly equity stipends as a percentage of their total salary, or new equity grants when they get promoted. Employees in these companies are shown how to think in $ amounts, not in %.
Multiple liquidity windows. Companies orchestrate employee (and early angel) liquidity multiple times a year, with transparent parameters set by the founders. For example, employees with a tenure over 2 years could be allowed to sell 25% of their vested shares every year, during 2 predefined time windows.
These practices are necessary in an environment like we have now, where companies stay private for over 10 years. They are what guarantees the alignment of interest between all stakeholders in the business.
There are some leading European companies paving the way, like Alan and Taxfix. They’re doing it on what’s essentially an ad hoc basis, but they will be followed by many more once habits change and the right infrastructure gets built.
By the way, if you want to discuss ideas and best practices on all this, don’t hesitate to send me an email: email@example.com 🙂