In the startup world, it can feel like everyone’s carrying employee stock options (ESOs) around in their back pocket. They’re used as compensation and incentives — but are they something you need to put on the table? After all, every option you give away makes the slice of your pie even smaller.
The possibility of future wealth isn’t the only thing that makes offering stock options to your employees worth considering. A compelling equity package can do a lot of good for your venture, especially when you’re trying to give your rocket ship a shot at liftoff.
So, here’s a look at four of the biggest benefits to offering a stellar equity package.
1. Compete for top talent
The best talent can work anywhere, and these days it takes more than a big paycheck to get them in the door. Employees take a chance when they decide to work for a startup, and ESOs help balance that out: With that risk comes a potentially big reward.
The opportunity to own part of something they’re helping to build is also something many employees want. It doesn’t top the list of what they’re looking for — that’s health insurance — but a survey by Glassdoor found that ownership options rank higher than paid parental leave.
2. Hang onto your best performers
Startup life isn’t a quick ride to the top: It’s a long haul, and you want to keep the best beside you for the journey. Shared equity encourages them to stick around.
By granting stock options that vest over time, you can entice employees to grow with your business rather than jumping off to pursue the next challenge. You can also roll ESOs into performance incentives and promotions.
3. Encourage an ownership mentality
“We realized that while company founders are owners, more importantly, so is the team,” says Joshua Reeves, Gusto’s CEO. “Igniting a true sense of ownership — the type that rallies the whole team around a single mission — starts with one’s equity stake in the company.”
Research has found that the average employee-owned company enjoys “increased firm productivity, profitability, and longevity” when compared to their competitors — especially if employees are asked to take an active role in how the company is run. Ownership makes everyone feel responsible for the highs and lows, which helps build commitment and a longer-term mindset. It can also reduce friction by getting employee goals in sync with shareholder goals.
4. Keep money in the bank
Being a startup doesn’t mean you’re broke. But if you don’t have the cash flow to offer market-rate salaries just yet, ESOs can help you compete without the need to hit the bank upfront.
Create an equity package that’s right for your business
Because granting equity is so darn complicated, founders often go with the cookie-cutter set-ups already out there. While there are certain advantages to the standard equity structures (you can get ready-made legal documents from your legal advisors) many entrepreneurs suggest creating one that jives with your business values.
“Whenever we’ve done financing, or whenever I’ve made offers here for candidates to join and I dove into a lot of the detail, I didn’t agree with a lot of the ‘standard terms,’” says Reeves. “We created our own equity structure that makes sense for our future.”
The best ESO strategy should be in sync with your unique company philosophy, striking a balance that ensures your team feels valued, motivated, and inspired to do incredible work.
Any equity strategy should be created in consultation with your attorney and tax advisor.