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How to explain the benefits of options to your early employees

options-to-early-employees

Here at Global Shares, we’ve seen the uphill battle that many founders face in their early years. The late nights, the lack of sleep – the only sign of movement being your slowly dwindling savings account. And the Ramen – loads of Ramen.

But say you make it through that. Your startup has finally, well, started up. You’ve expanded your business, and you’ve started making a profit, reaching more and more customers. Suddenly, you realize your business has gotten too big for just you and your co-founders. It’s time to hire your first employees.

If you have a great product or a great innovation, you’ll have eager recruits lined up outside your door in no time – everybody knows the advantages of being an early employee in a skyrocketing startup.

 

Stock for paint

Most people know the story of David Choe, or at least some version of it. Choe painted Facebook’s first office and asked for stock instead of cash. That was it – he didn’t come up with any ideas, he didn’t agree to paint every office, and he wasn’t exactly Banksy. But Facebook was a tiny startup at the time. Choe got the stock he asked for. That was 2005; ten years later, the stock was worth $200 million.
Stock options in a private company or startup can be powerful motivators in recruitment.

However, they do involve risk. Most startups don’t have much money for employees, so pay can be quite low for quite a long time. That’s why they offer equity, turning the company’s potential into compensation. But the reality is that many startups, no matter how great an idea they have or how great a company they are, don’t make it big. Few go public. So, employees might be reticent to take a smaller salary while they wait for what will hopefully be a windfall – but could turn out to be worthless.

Oftentimes, that’s ok – the reward far outweighs the risk. But what if you need an insurance whiz or an accountant? They’re not exactly known for their risk-taking personalities. How do you convince these recruits to join your startup? And it’s not just them – many people you are trying to recruit will also have questions. They might be applying to a few public companies as well, and at first glance, the public companies’ offer of equity seems far more generous. How do you bring these recruits on board?

The interview is the time to answer any doubts the recruits are having – you want them to come onboard excited to make an impact, and with an understanding of how their hard work from day one will eventually make them rich. A public company simply shows them the value and the average yearly growth – it’s a fairly straightforward benefit. With a private company, it’s a much harder benefit to quantify, as so much is unknown.

Here’s our suggestion for how to demonstrate your offer’s value, after you narrow down the list of potential recruits.

 

Show them the equity

For each amount of equity you are offering a recruit, run some modelling scenarios in your cap table, with some hypothetical but realistic scenarios – get the numbers on what their equity looks like after a potential next round of funding, and another, all the way to going public. Look at the dilution, the overall value, etc.

It’s important to highlight how much of the company their shares represent. Remember that this will be many people’s introduction to equity, and they might have a very limited concept of it. Often, a public company will offer thousands of shares, which sound like a lot more than a thousand shares in a private company. You might know that of course, you need to know how many shares the company has issued overall. But to someone without much financial experience, they might not even think to ask that question.

Sometimes, if there are too many scenarios to run, people can be frozen by choice, or overwhelmed by the possibilities. Make it as concrete as possible for them. Seeing their potential equity in action – even in hypothetical action – makes the equity’s value concrete for the recruit. It also allows them to see the goals of the company and what you hope the future looks like.

Naturally, depending on your cap table management software, this might not be the easiest thing to do. If you have an excel spreadsheet, for example, it’s going to be hard work. Even so, just remember that in a startup or small private business, equity compensation is the biggest incentive you can offer a prospective employee. It’s vitally important that you convey its value effectively.

If you don’t have cap table management software, you might be missing out on far more than just recruitment – you might be making big mistakes that will cost you down the road. Contact Global Shares for a commitment-free demo today.

 

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Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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