Questions about Upstock, dynamic worker equity, or even why we started Upstock to begin with?
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Why was Upstock created?
Upstock was founded on a core belief: successful companies are built by collaborative teams. Collaboration arises, in part, when each worker believes they will be fairly rewarded in exchange for their hard work.
At Upstock, we believe that shared company ownership (also known as equity) is a critical tool to produce motivation, dedication, and collaboration between team members. Upstock offers tools to make sharing company ownership extremely simple, so that teams of all sizes and budgets can effectively join forces to build the next big thing.
Upstock allows teams of all sizes to instantly deploy equity to their workers, without having to hire expensive third parties such as lawyers and accountants. Traditionally, only a small number of companies, primarily tech startups, could afford to offer shared ownership to their workers. With significant up front costs, startups in the past often have to pay 10’s of thousands of dollars to set up a reasonable set of stock option documents. For most small businesses, it’s no wonder that they get stuck with napkin and handshake agreements.
Shared company ownership allows workers to focus on a common goal of shared success and help everyone feel like ‘we’re in this together.’ It helps workers prioritize long-term growth of the company over short-term personal gain. And it creates a feeling that workers have gotten a fair exchange for the value they’ve generated.
We’re also passionate about making sure the equity splits remain as fair as possible. Upstock’s Dynamic Value Splitting assigns equity according to each worker’s contributions, ensuring that they receive a share of the company corresponding with their effort & impact.
At Upstock, we are building a world where everyone involved in a business can click a few buttons and see, in clear detail, their share of the company at any given time. As they continue to contribute to as positively impact the company’s growth, each worker is able to view their own individual share moving up and to the right.
When teams come together, innovation is born. But in order for teams to truly unite, they need to feel like they are all in the same boat. Upstock allows teams to trust that they are all getting their fair share, so every worker can focus on helping the company succeed.
How does Upstock work?
Upstock is a user-friendly technology layer on top of standardized legal documentation. Our product combines Instant Equity Deployment, a Dynamic Value Splitting algorithm, and a compelling real-time Motivational Visual Dashboard.
Upstock has designed a system to optimize trust, efficiency, and alignment between the worker and the organization as a whole. Our innovative software allows any team to create equity pools, divide company ownership, and monitor equity splits and/or profit sharing directly inside our app.
Upstock is designed to make it easier for businesses of all sizes — especially those with limited resources — to allocate and administer company ownership without the expense or delay of engaging third parties to serve as middlemen, such as lawyers or CPAs.
At Upstock, we believe business legal services like worker equity should be able to be set up and managed with just a few clicks, rather than having to be created from scratch by expensive lawyers each and every time. We aim to standardize and virtualize business legal much in the way Amazon AWS has standardized server administration, replacing highly paid system administrators with easy-to-customize DIY administration that employers can manage themselves.
Upstock’s system has three core components:
Instant Equity Deployment: Upstock allows employers to offer workers legally binding equity with just a few clicks, using documents created by the world’s top equity lawyers. These units can be issued inside our system with just a few clicks, without requiring third parties such as lawyers or CPAs.
Dynamic Value Splitting: Upstock’s equity units are then distributed dynamically between workers according to our performance-based algorithm, which measures workers’ input to determine a fair equity split.
Motivational Visual Dashboard: This equity split is then displayed in real time on a visual dashboard, generating a meaningful feedback loop for workers and employers, who start to truly feel on an emotional level that their work matters.
> Part 1: Instant Equity Deployment
One of the main challenges for small- to medium-sized teams who wish to issue workers shares of the company: It can be both expensive and time-consuming to set up a company-wide equity system.
> Part 2: Dynamic Value Splitting
Because Upstock is a technology layer on top of legal documents, we are able to offer something that traditional paper-based plans cannot: A dynamic value splitting algorithm that fairly slices the company pie according to each worker’s contributions.
Upstock’s dynamic value splitting algorithm dynamically assigns RSUs based on inputs to the system, allowing equity splits to shift over time according to the value that each worker generates.
While traditional RSUs are already used to incentivize employee work within most Fortune 1000 firms, functionally there is little interaction with the RSUs after the employee is given the paperwork. Traditional equity plans focus the worker on the vesting calendar (typically resulting in diminishing returns on productivity over time), rather than on day-by-day, moment-to-moment performance.
With Upstock, workers are granted a dynamic proportion of equity, shifting according to real-time value contribution, rather than a set amount of shares tied to a vesting schedule. As such, performance becomes the focus rather than a vesting calendar, as workers are granted equity based on time, task, sprints, and/or a landmark event.
The visibility of each worker’s input into the company helps generate alignment with organizational performance, allowing each individual contributor to see their value creation as it relates as a percentage of the whole.
> Part 3: Motivational Visual Dashboard
Workers can’t believe what they can’t see. One of the greatest challenges with traditional equity systems is that, for most workers, they become essentially dead documents, forgotten in a drawer or online file storage untouched.
Equity is meant to be a motivational tool that allows workers to feel like they’re being rewarded for their effort. However, it’s challenging for employers to generate this motivation if workers have no way of visualizing the amount of equity they are accruing, or understanding the trajectory of the company’s overall value.
Upstock’s motivational dashboard allows workers to see and believe in the value of their contributions to the long-term health of the company, giving workers and employers a window into the value of their equity at any given point in time.
This enhances the benefits of equity allocation for both workers and employers. Being able to see the organization’s performance, valuation, and pool point rates increases trust in leadership, and helps workers believe that performance is being fairly rewarded.
Some people invoke a video game metaphor. Think about what kind of game or systems capture our attention and time most. Those are the games we start by playing around with. If we can quickly learn, with minimal instruction, to receive a benefit, those are the kinds of games we become more interested in. If we continue to play, continue to learn and win. We continue playing. The old game of stock options is like someone handing you a thick game manual that you can not really understand and then asking you to trust it’s a fun game. Next you have to play the game in your head. These are the kinds of game manuals that people put in a drawer and forget. These are the ones that collect dust and eventually are thrown away five years later. Compare this to a dynamic game where users can see their equity changing in real-time, where workers can receive bonuses of equity, where workers can get inspired and learn more rules of the game on the fly.
This usually results is both increased alignment and performance across the workforce. Workers can feel that they are actually headed toward a shared goal: building a valuable company. Workers know that they will receive their fair share when the company succeeds.
How is equity assigned, if not by vesting schedule?
When workers are on-boarded onto Upstock’s system, employers enter agreed-upon cash and equity rates. These rates can be updated or changed at any time.
For instance, a marketing manager may be hired at $4,500 per month cash rate, plus an assignment of $1,500 per month worth of points in the equity pool. Or, a java developer who normally charges $100 per hour instead agrees to charge his client $50 per hour in cash and $50 per hour in equity.
As the worker completes work, inputs such as hour/day/week/month or project/task are logged, and workers are granted pool points (representing shares in the company) according to their agreed-upon equity rate. Their slice of the pie dynamically shifts as they put in increased work, and the value of their shares grows as the value of the company grows.
To further incentivize workers to put in extra effort when it is most needed, leaders are also able to use bonus equity grants to compensate workers for additional efforts through critical periods. For example, an employer could double pool points for the weeks before a big goal, or when tied to a landmark event (e.g. any current worker in the organization at the time of the landmark event gets a 200% bonus of RSU pool points).
Upstock drastically simplifies a company’s cap table because an entire performance pool, with all of its workers, can be represented with a single line item. For example: “Upstock performance equity RSU pool, 10,000 shares.”
Why RSUs instead of stock options?
Please Note: The information contained within this section is specifically tailored to businesses incorporated within the United States. Upstock uses different units of equity in various countries, depending on what our equity lawyers advise is the best possible unit for that jurisdiction. Please contact our team if you would like to know how our documents work in other locales.
Stock options used to be standard for companies wanting to incentivize top talent— but unfortunately they come with significant downsides, both for workers and employers. In an article from April 2019, Steve Blank in the Harvard Business Review called stock options “a good deal gone bad.”
Because Fortune 1000 firms have greater resources, they were the first to innovate on equity systems. After the mid-2000s and scandals such as Enron and WorldCom, companies began offering Restricted Stock Units as executive compensation instead of stock options. Eventually RSUs became adopted as the gold standard for top-tier companies, almost replacing stock options entirely.
Unfortunately, this wasn’t the case for small- to medium-sized businesses, because of the significant cost of setting up RSU-based legal contracts.
Upstock is designed to change that. We believe that businesses of all sizes, stages, and budgets deserve access to top-of-the-line equity that provides favorable conditions for workers and employers alike.
Upstock’s system is based on a tried-and-true formula within the equity ecosystem — Restricted Stock Units (RSUs), the same unit of equity in use at most Fortune 1000 company.
RSUs are vastly preferable to traditional stock options for workers, because they reduce taxation and reporting requirements. RSUs are also better for employers, because they do not affect cap tables or grant shareholders’ rights, allowing greater flexibility and more streamlined decision-making.
Before Upstock, RSUs were by and large inaccessible to small- and medium-sized businesses, due to the prohibitive cost of bespoke RSU document creation. Upstock was founded on the belief that RSU-based equity programs should no longer be restricted only to companies like Google, Apple, and Facebook, who can afford millions of dollars in legal fees.
Upstock’s mission is to create a world where fair company ownership can be enjoyed by every team, everywhere. Within the US, RSUs are a huge part of making that possible. We rely on the world’s top equity lawyers to advise us regarding the preferred equity units in each market we enter.
The major benefits of RSUs (when compared to stock options) for businesses include:
More fair to Early-Stage Workers
Increased Cap Table Flexibility
Streamlined Company Voting
Reduces 409A Valuation Costs
> Part 1: Preferable Taxation
Taxation With Stock Options
One of the greatest challenges with stock options is that their taxation timeline creates major financial risk for workers, and burdens workers with huge bills during periods where there may be insufficient money to pay.
Stock is illiquid & cannot be used to pay bills
Stock options allow workers to purchase stock at a predetermined price at a later date, regardless of the stock’s market price at that particular point in time. The catch is, even though the stock must be purchased by the worker, at the time of vesting and/or exercising of options, most stock options have no liquid value, and are not usually transferable.
This means workers are generally stuck with a huge bill for something that they cannot easily sell some of to cover the costs of purchasing the stock, or to pay for their own daily expenses. As a result, figuring this all out and then receiving the stock becomes a mental and financial burden on the worker. Finally, these burdens, coupled with little to no guarantee that the stock will ever actually be worth something in the long run, results in most workers forfeiting the equity. Workers often feel cheated and demoralized.
Workers must pay additional tax on company gains
Not only does a worker need to pull together the money to pay for the stock when they exercise their options, in addition, many workers may not be aware that an increase in stock value is a taxable event in and of itself.
If the value of the stock has risen since the stock options were issued, workers must pay tax on the price differential as well. (And in some cases, an additional tax vehicle also applies when options are exercised, called the Alternative Minimum Tax or AMT.)
This means that, if the company’s value has increased, workers are taxed on these gains as if they experienced an actual windfall. However, the exercised shares are generally not liquid immediately and cannot reliably be turned into cash to pay the mounting tax bill. Thus workers have to pay significant taxes upon exercising, without having a route to easily access additional resources to cover the costs.
Workers lose incentive to buy if stock price goes down
Because a worker’s stock price is locked in at the time of the option issuance, if the company’s stock price goes down or remains relatively flat, workers lose their incentive to buy the stock they’ve been working for over time as the value of the option goes down.
For workers, it is not worth exercising the option at all if and when its price is above going market rate for the stock. This means that workers, who are generally expecting that they will own something valuable in exchange for their hard work, are often left with no stock at all, causing them to lose their incentive to help the company succeed overall.
Workers are confused and paralyzed because they can’t understand the tax or the risk
More often than not, workers are surprised by how much they’re required to pay, both in taxes and for the options themselves, in order to purchase the stock they thought that they were receiving all along.
This creates a scenario where many workers are confused about whether or not exercising options is a good idea, burdened by the financial outlay required to purchase their stock, and hit with a significant tax bill for the increase in the price of the stock — all in addition to already paying taxes on the salary used to purchase the options themselves. All this with little-to-no visibility of the company’s overall valuation, health, or viability as an investment vehicle.
Workers who wish to make educated decisions generally have to hire a lawyer at their own expense to make sense of their stock option plan, because it is a conflict of interest for their employer to provide that information. And even if they do hire a professional to explain, they often won’t be able to remember much the very next day, due to the complexity of the system.
Many workers seek to avoid this additional cost and let their equity documents collect dust in a drawer. They are later caught by surprise when they realize just how expensive it may be to receive their share in the company.
Burdensome taxation makes stock options demotivating for workers
What is the result of the current stock option system? Workers face significant downside at the moment they consider exercising their options. At a time when they could be celebrating a fair reward for their hard work, instead they are often confronted with a significant financial burden that most workers did not fully understand prior to the date of exercise.
This leads to worker demotivation and disengagement, especially as workers start to leave the company and complain about the ‘bum deal’ they received upon departure. Questions often emerge amongst workers about whether or not they got a fair deal, reducing trust in leadership and contributing to a more toxic company culture.
Taxation with RSUs (as used by Upstock)
RSUs correct many of the most egregious downsides of stock options for workers, particularly when it comes to taxation.
Taxation occurs when money is available to pay the tax
When workers are granted Upstock RSUs, taxation is timed to occur with a landmark event (IPO or sale of the company) and the shares can be sold to cover the cost of the tax bill, also known as “sell to cover.” As a result, Upstock RSUs allow workers to avoid paying tax on stock until there’s money available.
Taxes correlate with company success, reducing worker risk
Taxation at the time of a landmark event also helps to fix the problem of workers having to pay tax on stock when they don’t yet know whether or not it will be worth something. Unlike with stock options, if the company is not successful, workers won’t lose all the money they paid in tax (tax on salary used for exercise) and also on the exercise of the stock — stock that would be worthless in the case of company failure. Proponents of stock options will sometimes say that options allow for a lower tax rate, but when a reasonable person does their research they will see that the risks required to get the lower tax treatment are not worthwhile for most workers. The chances of getting value from an RSU is much greater all things considered.
Workers’ incentives don’t shift with stock price
With RSUs, shares are always worth something as long as the company is still going. Options are only worth something if they have increased meaningfully from their strike price. RSU’s don’t leave workers demotivated by shares that are worth less than the strike price. Thus they are better able to believe in the value of their equity.
> Part 2: More Fair to Early-Stage Workers
Stock Options & Early-Stage Workers
Early-stage workers take on disproportionate risk
Stock options are a significantly worse bet for earlier-stage workers than later-stage ones, because they can be subject to taxation as company value rises, even though workers cannot liquidate them (possibly ever).
Upstock is actively working to make a greater number of companies become successful but the fact remains, nine of ten companies fail, meaning stock inherently carries a relatively high risk of being worth nothing in the long run, but to receive stock, workers are still required to pay tax without access to accurate knowledge about whether or not the company will be worth anything during later stages. The longer a worker stays with a company, the more they are likely to have to pay in tax as the company’s value grows, even though the odds of success remain relatively the same.
RSUs (as used by Upstock) & Early-Stage Workers
Early-stage workers can be rewarded for risk taking
With RSUs, company growth over time is not an ongoing taxable liability for workers. If the company is successful and reaches a liquidity event, workers will automatically receive their RSUs. They will then have a taxable event and will likely have to sell some of their shares to be able to pay that tax.
Workers don’t have to exercise options upon leaving the company
Workers receiving Upstock RSUs can easily be allowed to keep some or all of the equity they’ve earned after they depart a company. This is really important for workers who take an outsized gamble in the early days of a company that is starting up.
> Part 3: Increased Cap Table Flexibility
Cap tables with Stock Options
Each new worker must be added to the cap table
Because stock options are managed via a cap table, each new worker added to the option pool requires an entry on the cap table. This incurs additional lawyer and administrative fees for each new worker added, as well as relative hassle and fears activist workers delaying the company due to their shareholder rights.
More difficult to hire new workers
The added cost and difficulty of adding each new person to the cap table, as well as the shrinking pie with each new team member, means that employers have a disincentive to hire new workers, especially if they might require a significant portion of the remaining equity. For cash-strapped companies, this makes it challenging to offer robust equity grants, right when they need to attract top talent most. Because managers are concerned about running out of equity, this breeds a scarcity mindset and then causing managers to lowball new hires on the number of stock options offered. That’s not a great way to start a new relationship.
Cap tables with Upstock RSUs
New workers can be added without additional cost or effort
Unlike traditional stock options, Upstock eliminates the need to adjust the cap table after every new stock option grant, as well as to get board approval for each new worker being added. Workers can be added to the equity pool almost instantly, without paying any lawyer fees to do so. Thus organizations are able to significantly reduce legal expenses, especially during early cash-conscious days in the company’s development. Finally, equity can be given as bonuses by managers without needing board approval.
Equity pie can grow with the company
Companies can start with a smaller pool and increase its size if the company adds more workers to the performance pool, as the economics of the pool dictate. Alternatively, if the valuation of the company increases, this increase may not be necessary.
Workers can be incentivized with equity instead of cash
Employers typically need to attract talent to help their business succeed, but many businesses find themselves without enough money in the bank to hire top-tier support on cash alone. Being able to seamlessly and instantly grant workers dynamic equity is a game changer. Upstock’s low monthly fees allow practically any team to offer equity to workers. Upstock is approximately 40x more affordable than hiring a team of experts to create a performance equity system.
> Part 4: Streamlined Company Voting
With Stock Options
Each person added to the cap table is potentially granted shareholder’s rights
Stock options require an amendment to the organization’s cap table with each new hire, which could eventually grant workers shareholders’ rights if they exercise the option. This issue creates uncertainty and even hiring and firing paralysis for owners and investors.
Equity can be issued without granting shareholders’ rights
With RSUs, workers can receive a stake in the company without being added onto a cap table or granted shareholders’ rights.
This is an advantage over stock options because reducing the number of constituents on the cap table allows them to act more decisively and effectively. Fewer cooks in the kitchen means important decisions can be made without having to worry about decision-making between factionalized voting bodies.
> Part 5: Reduces 409A Valuation Expenses
With Stock Options
Companies are required to pay for 409A valuations to remain compliant
Because companies who issue stock options must constantly be able to quote a fair exercise price to be able to issue new options to workers, they are required to pay for a 409A valuation. These need to be renewed every 6 to 12 months and third-party vendors must be paid for each time. This can cost one to ten thousand dollars or more each year.
Value appraisals are not always required
Because RSUs gain their value only at a landmark event, 409A valuations are generally not required, due to the fact that the market rate for the company will have already been established by the sale or IPO of the company. Thus, employers issuing Upstock RSUs can usually avoid paying $1,000 to $14,000 or more each year for 409A valuations.
Unlike stock options, which are most often only issued to employees within the home county of the conpany, Upstock allows companies to issue RSUs to contractors, employees, advisors, and founders, all within the same or different equity pools
Upstock allows workers to be granted equity internationally in 40+ countries. Click here for a database of countries where RSU’s are recognized appropriately. https://www.dlapiperintelligence.com/goingglobal/global-equity/index.html?t=restricted-stock
Does using Upstock increase or decrease risk?
Upstock is built with the goal of substantially reducing the risk of setting up equity systems. This is achieved in two major ways:
Top-Tier Legal Documents: We have designed our documents hand-in-hand with some of the world’s top equity attorneys, ensuring that every Upstock customer benefits from top-of-the-line Fortune 1000-grade plans
Automatic Upgrades & Administration: contracts are continuously upgraded over time according to a shifting legal landscape.
Increased Worker Motivation: Relative to traditional paper-based stock option plans, Upstock is less likely to leave workers feeling like they got a ‘bum deal’ and poisoning the company well
> Part 1: Top-Tier Legal Documents
With Upstock, employers can be certain they are issuing the best possible legal contracts available, created by the world’s top equity lawyers.
In the old stock option system, most employers lack access to top-shelf legal structures, due to their hefty price tag. As a result, the average business owner seeking to grant equity typically ends up paying a neighborhood lawyer to generate their documents, who may be unfamiliar with the particular nuances of equity litigation or case law.
The lawyer typically then makes minimal changes (if any) to boilerplate documents, invoices the employer a hefty bill for their time, and delivers a stack of documents that neither the business owner nor the employees can understand without paying even more money for legal advice.
Upstock does away with the potential risks of hiring a lawyer who doesn’t know the specific pitfalls of equity issuance. Upstock’s contracts have been fully vetted by the top minds in equity, including Tery Williams (18+ years running international equity plan design at HP & Baker Mckenzie) and Fred Whittlesey (30+ years as an expert witness in equity litigation disputes).
This means that every equity contract issued by Upstock has been bulletproofed to protect companies from worker disputes and litigation. Before Upstock, access to these types of legal experts was typically beyond reach for the average small- to medium-sized business. Now with Upstock, small- to medium-sized businesses can use the same high-end legal documents that Fortune 1000 firms use to grant RSUs every day, designed by the same lawyers as the companies who are winning most.
> Part 2: Automatic Upgrades & Administration
With Upstock, unlike with stock options, employers don’t need to take actions to maintain or administer their equity documents each year. This means that entrepreneurs can stop worrying if their option plans are remaining compliant as the law shifts. They can also avoid the annual administration fees that must be paid to lawyers to keep their documents up to date.
Keeping a pulse on the cutting edge of equity law allows Upstock to automatically upgrade clients’ plans according the most preferable terms available. This means employers don’t have to become equity experts themselves just to make sure their team is getting a fair deal.
> Part 3: Increased Worker Motivation
It has been shown — by Steve Blank, Harvard Business Review, and others — that stock options represent a ‘bum deal’ for many workers. Over time, this sentiment removes the promise of equity as a motivational tool, and starts to generate a toxic work culture where workers don’t feel like they are going to receive what they are due. If this occurs, it can be a fatal shift for businesses.
With Upstock, workers can see what they are earning in real time and believe that their hard work is paying off. They also receive the significant taxation benefits of RSUs, without having to work for a large multinational company. This generally means they are more likely to have a positive experience receiving, managing, and viewing their equity, allowing it to serve as the alignment tool it was intended to be.
Can employers control transparency levels within Upstock?
Upstock allows companies to adjust transparency of information within the dashboard to suit their particular company culture. Options exist to adjust the transparency of information on:
equity as divided by percentage of the pool
powerful performance motivators such as the current RSU pool valuation
or the most recent company valuation
individual worker pool point accrual rates
By making visible the entire organization’s current pool point rates, workers are able to see at a glance that there is equality across all levels of expertise and value creation in the organization. When equity allocation is made visible, we have found that there is an additional human impact: a sense of compensation fairness enters the company culture, and workers’ trust in leadership, as well as motivation for individual performance, increases. Not all company or cultures around the world are compatible with this concept so each company needs to make their own decision.
Increasing transparency around the stock pool has a direct and positive impact on a company’s stakeholders. Investors and founders benefit as it rewards value creation rather than passive time elapsing (workers simply hanging on), as well as gives an additional incentive that will attract top talent. Additionally, companies can hire high performers as contractors. These are folks who are traditionally left out of equity plans but would be delighted to be made a part.
Is Upstock essentially an equity lawyer online?
It is important to note that Upstock is a sophisticated software product backed up by top-shelf legal documents, well-researched case law, and vetted by some of the world’s very best equity attorneys. Upstock’s technology is not an attorney, nor does it give legal advice.
Although we have a team of lawyers on staff, Upstock as a company and product do not offer legal advice. It’s highly possible to use Upstock’s system without hiring a lawyer, and we have many clients who do just that. Other clients have counsel that give them additional legal support in situations where that is desired. Ultimately, we urge any organization wanting customized legal advice to seek out their own legal counsel with a bar-certified attorney with an applicable area of legal focus.
What happens to company equity if I stop using Upstock?
Upstock’s legal documents start with a set apportionment of equity, with built-in elasticity that evolves over time according to inputs to the performance algorithm. They are binding legal documents that are optimized for the long term. If a client ever decides to stop using Upstock, the documents (including the final slicing of the equity pool) remain valid in perpetuity.
We’ve found that clients prefer to remain on the Upstock platform so that equity can be used as an effective motivational tool, shifting in proportion with the amount of hard work that each worker contributes over time. However, if a client’s business does fold or Upstock is no longer a fit, they can cancel at any time without affecting the equity already held by their workers. As long as clients remain on the Upstock platform, they will benefit from real-time changes to equity case law and the associated updating of Upstock’s equity system, resulting in documents that are current and have legal relevance far after the program’s inception.
If Upstock itself were ever to transition out of existence, the platform and tools will continue running for as long as it’s possible to maintain them in light of technical evolution (a number of years in the worst case scenario). All legal documents will remain 100% valid and will be retrievable from the system.