What Are Equity Compensations? Are They Good For Your Startup?
Most startups need more funds to hire the fantastic talents that the startup leaders believe are the ones they require the most for perfect initiation.
Naturally, high-tier talents demand high-tier salaries, and if your startup is anything like the 33% of startups that have less than $50,000 in total capital, then equity-based compensations are a life-saver for your startup.
Equity-based compensation plans are employee benefit plans that make it lucrative for highly efficient people to come and work for you
Equity compensation plans not only help startup leaders to ensure the right talents but they also offer potential tax benefits for the employees.
In this article, we’ll take a thorough look into
What is equity compensation?
How do they work?
Their legal structuring.
Any upsides or downsides?
Alternatives to equity compensations?
Some common mistakes.
Factors to consider when implementing them.
And the difference between equity compensations of startup and traditional companies!
What is an equity-based compensation plan?
Simply speaking, it’s giving ownership through stocks of your company to those sought-after employees whose services you cannot afford to pay at such an early stage of your startup.
By ensuring that your company offers equity compensations you may have a higher success rate at securing the right kind of talents you deem fit for your business model.
Does that mean implementing equity compensations is a fail-safe method to acquire quality talent? The answer is of course no!
There are a few requirements that dictate whether your startup’s equity compensation plans will be taken up by the top talents or not. Let’s see a few of those.
Requirements to procure top talents through equity compensation plans
There are a few metrics that the individual has to consider before accepting your equity-based compensation offer:
The growth potential of your company
Unless you can assure your prospective talent that your company holds great potential for growth in the long run (via your company’s business model, financial backup, and market potential, mostly) you can’t be certain that people would be willing to pick up on your offering.
Valuation of your company
A high market potential, strong financial performance, and considerable expansion in the customer base are a few of the metrics that determine the higher valuation of any startup.
If you have a highly valued company then that ensures talent would want to pick up your equity compensation plans.
Equity Percentage
The amount of equity that’s being offered (especially in comparison to other talents - hey, we are humans after all!) can play a big motivation for your desirable candidates to pick your offer.
Equity vesting schedule
If the schedule and frequency to exercise their equity shares don’t match with talents’ personal financial goals, they may not want to take up even your best equity offerings!
Thus, even though equity compensations are almost a certainty to acquire top talents, there are some must-have prerequisites without which your best offers will not yield desirable results.
How does equity-based compensation work?
Equity-based compensation plans are basically offers of ownership in the company to top employees in exchange for their services.
The most typical methods are offering stock options, stock grants, and restricted stock units (RSUs).
Each one of these plans has a different set of rules in their execution to some degree but all-in-all they all offer employees a stake in your company.
How equity-based compensation plans are beneficial to your startup?
A startup has many challenges that it has to overcome and again I emphasize that one of them is attracting top talent which many startup leaders don’t even consider while initializing capital funds.
If you are a startup founder, you are probably going head-to-head with larger and more established companies that can offer bigger compensation rates.
However, to even the odds, you can offer equity compensation and with that, you get a multitude of benefits that will strengthen your startup, here’s how:
Attracts top talents
You will not believe but there are many highly skilled and extremely experienced professionals that look out for such startups that offer equity-based compensation plans because they know the potential of significant financial rewards and even proprietorship in the future.
Aligns employee interest toward company goals
Once your employees own a stake in your company they are then more likely to be invested in its success and thus are motivated to work harder to achieve business goals at an accelerated rate.
This, in turn, creates a culture of collaboration and teamwork wherein employees keep the long-term success of the company in mind rather than short-term sporadic bursts of success.
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