April 5, 2022
In the past, if you had a large, tech-focused company, offering ownership to your employees was common, though far from expected. But in the past few years, offering employee equity compensation plans to workers has quickly grown to become the most vital and effective way to help them remain engaged with the company.
An AON market analysis found that 49% of S&P 500 companies offer equity to employees. Research shows that when employees feel like owners, they are more enthusiastic, hardworking and loyal.
Employee equity compensation plans, such as stock based compensation and restricted stock units, have historically been complicated and difficult to understand. If even the owners didn’t understand the benefits of their own equity based compensation plans, how could they explain them to their employees?
Throw in sensational headlines about a company stock price falling, and many employees may start to have misgivings about the risks of having ownership in the company. After all, what if the company fails and the company stock becomes worthless? It’s your job as an owner to make sure that your workers and team members understand the risks and rewards of the company equity compensation program.
Your organization might offer equity compensation in exchange for lower monetary pay, with the hope that the employee equity will be worth more than its current price in the long run. This makes it even more critical for company executives and key workers to understand what they’re getting and the consequences when they accept or receive equity compensation.
In order to really value the equity they receive, workers need to understand it. The smartest companies know that employing an effective technique is key to equity plan communication.
Take note: equity compensation is not without its challenges. For instance, stock options as equity compensation benefits can strain a company's cash flow and dilute the ownership interests of existing shareholders sooner than other forms of employee compensation. This is why it’s necessary to choose the ideal form of equity compensation, preferably one that offers a positive or high cost-benefit ratio.
The most popular types of equity compensation: stock options and restricted stock units.
Employee stock purchase plans (ESPPS) involving stock options give employees the right to purchase stock. The employers typically give their workers an employee stock purchase plan at a discounted price. Stock options are often seen as more risky because they can become worthless if the stock price falls below the strike price.
Employee stock option is also not ideal for early- to late-stage private companies as workers have to come up with the money to purchase company stock at the exercise price. Lastly, employee stock options have an immediate impact on the cap table of companies and workers obtain shareholder rights.
Restricted stock units are grants of company's stock that vest over time, typically four years. RSUs are less risky because they always have some fair market value, even if the stock price goes down. It is not the obligation of RSU recipients to purchase company shares unlike with an employee stock purchase plan. The company shares are granted themselves based on the vesting requirements. RSUs can have a single- or double-trigger vesting structure.
The single trigger vesting schedule grants shares based on a performance or time-based goal.
A double-trigger RSU, on the other hand, vests only when two conditions are met: the achievement of particular performance targets and the occurrence of a triggering liquidity event, such as a change in control of the company.
A double trigger restricted stock unit is a popular type of compensation that is typically granted to executives and other key employees of private companies with limited cash flow but that have great growth potential. Compared to all other types of equity compensation, it provides greater downside protection for employees in the event of a corporate transaction e.g. acquisition, merger, or initial public offering (IPO).
For example, if an executive is granted double trigger RSUs that vest upon the achievement of certain financial targets and the sale of the company, the RSUs will still vest even if the company is sold for less than the original asking price.
This type of flexibility can be critical in ensuring that key employees are incentivized to stay with a company during periods of transition.
Learn more about stock options and RSU.
With the right form of employee equity compensation, it is a powerful tool to attract and retain employees. However, it is essential that employees understand and feel engaged with the equity plan. Equity compensation programs can be complex, and there is much room for error in communication. Here is how to ensure the effective communication of employee benefits:
Traditionally, the way established companies, especially public companies, have explained equity plans is through a long, tedious, and usually boring presentation packed with complex legal language that workers may not understand. Lawyers are often needed to come in and explain complicated legal concepts.
Luckily, these days, there are tools that can simplify and boil down the most important aspects of equity. They allow employees to understand their benefits in simpler terms.
Remember that not all workers have the same levels of knowledge and familiarity about equity. Some may have decades’ worth of experience with equity plans; others may be receiving them as part of their compensation package for the first time.
A one-size-fits-all email or presentation can’t possibly address all of the questions that may arise. Fortunately, you can personalize your resources by surveying your employees, formally or informally, to gauge their understanding of the principles of company ownership. This way, you can learn how to segment and target them.
In order to understand their equity plans, workers needed to find a lawyer who could help them decipher if the company has a conflict of interest, or provide advice about how much equity they own and the value. This often costs considerable time and money.
A platform like Upstock, however, has already absorbed these costs by working with lawyers and experts in building out a vast database of educational materials that workers can use to further understand their equity plan on their own time.
Upstock also has an intuitive dashboard where workers and team members can see the value of their equity in real time. The goal here is to convey equity in ways that build trust within a team.
Tools like Upstock reduce the need for lawyers to act as middlemen. This enables founders and employees to foster a direct relationship based on trust, rather than appearing as adversaries.
That usually leaves employees feeling a greater sense of purpose and connection with the company, and leads to the creation of an ownership mindset. When workers own something, they identify with it. Anything humans identify with, they automatically work to improve. That goes for owning equity in companies, too.
It is important to distribute and keep documents like copies of equity plans disclosures, external communications, and other contracts and agreements in an easy-to-reach location for workers to access on their own time.
This can be done through apps like Upstock which feature a recordkeeping function. Online apps make sure that the company is seen as transparent and fair when it comes to these legal documents. It lets employees know that their company is looking out for them in order to make sure they get their fair share, before and after the company becomes successful.
Coupled with intuitive dashboards, a mobile app, and related materials, Upstock allows workers to see the company’s growing valuation, and see how much their equity could be worth over time if the company keeps growing. This helps build and retain trust and keeps workers wanting to contribute more to the company.
Of course, having access to a professional is important, so consider inviting the administrators of your equity plan to make themselves available to consult with workers in small groups or one-on-one. But be careful, your company must be sure not to “provide legal advice” to workers. If you inadvertently provide incorrect information that could open your company up to a dispute later on, Upstock can help you communicate and help ensure that workers get the correct information from the start.
It’s no secret that the way we consume information these days isn’t the same as it once was. Not many people have time to sit down and read lengthy manuals full of jargon that explain employee equity. Using different forms of content like video, audio, infographics and other forms of rich media simplifies complex concepts into more digestible offerings that can be consumed in a sitting.
Employees can’t value something they find too complex to understand, so presenting information in a way that’s simple and fun goes a long way to getting them onboard.
Likewise, it’s ideal to keep them informed on a regular schedule in a way that’s automated, such as before a major vesting date. Upstock does this through its automated notification system that keeps team members in the loop with regard to important events regarding their equity plans.
A company that offers equity to its employees is a company that values their contributions and wants to demonstrate that in an immediate and tangible way. When workers and team members can see how their actions contribute toward the company’s success, this helps build a culture wherein everyone wants to contribute more of themselves to achieve a common goal.
A big win in the company is ideally shared at company-wide meetings and celebrations where leadership thanks everyone for their contributions. However, those personal moments when an employee sees the company’s value go up are just as important. Through a platform like Upstock, workers and employees are able to experience that personal connection every time they log in.
Again, it isn’t enough to merely offer ownership in a company; it’s on you as an owner or founder to help your workers understand it. It’s only then that they can start to recognize the true value of ownership and buy into the mission, creating alignment and better value for everyone involved.
Here are the most common equity plan communication mistakes to avoid:
Equity compensation should align with your company's overall business objectives. Employees need to understand how their equity grants contribute to the company's overall success.
Employee equity plans are dynamic, and changes are often necessary to keep the program aligned with business objectives. Employees must be kept up-to-date on any changes to fully understand how their equity grants may be affected.
ECAs can be complicated documents, and employees must understand all relevant details before signing one. Failing to provide adequate information about equity agreements can create confusion and mistrust among employees.
Equity compensation is often directly tied to stock price performance, and employees need to be kept updated on both positive and negative news. Failing to provide accurate and timely information about stock price performance can erode trust and engagement among employees who hold equity grants.
Employee feedback should be actively solicited to ensure that communications are tailored to meet their needs and expectations. Equity compensation should be presented in a way that is easy for employees to understand and makes them feel valued by the company.
Equity compensation through double trigger RSUs offers potential tax benefits to employees. Still, it is important to clearly explain the tax liability associated with the option to receive company stocks along with the tax benefits.
All these should be explained upfront so there are no surprises down the road. Failing to educate employees, especially about tax implications, can create frustration and resentment toward the equity compensation program.
Fortunately, unlike employee stock purchase plans involving non-qualified stock options, restricted stock awards and other incentive stock options, which allow employees to purchase shares, and RSUs with a double trigger vesting schedule, offer great tax benefits. Regular income tax applies only when the RSUs vest on the grant date.
In fact, more tech startups and other privately owned businesses in various industries are starting to see the value of using double-trigger RSUs to motivate employees.
Equity compensation can be a great retention tool, but only if employees know of its existence and how it can benefit them personally. Make sure your communications highlight how equity compensation works and how it can help employees secure their financial future.
If you're looking to offer equity compensation to your employees, there are a few things you need to do to get started. Here are some top tips for putting your equity communication plan into action:
What do you want to achieve with your equity compensation plan? Do you want to attract and retain top talent? Encourage employee ownership? Align employee and shareholder interests? Communicate these objectives to your team so they can create the plan.
Will all employees be eligible or just a specific class of employees (e.g., executive-level)? If you're targeting a specific group of employees, what criteria will they need to meet? Defining this upfront will help ensure that your plan is well-targeted.
There are a variety of equity compensation structures available, so it's important to select the one that best meets your objectives and the needs of your business. Some factors to consider are the level of risk involved, the vesting schedule, and the tax implications.
Once you've decided on an equity compensation plan, you must communicate the details to all eligible employees. Ensure they understand how the equity compensation works and what they need to do to vest their shares. Employees should also be aware of any risks involved in taking equity compensation.
Equity compensation plans should be reviewed on a regular basis to ensure they're still meeting the needs of your business and employees. If there are changes in circumstances (e.g., new hires, departures), ensure that those changes are reflected in the plan accordingly.
Upstock is an equity and cap table management app that provides equal focus and attention to founders and workers. As an equity plan creation and management software, it enables founders to create equity plans and manage them, and workers to keep track of their equity and legal documents intuitively and in a centralized location.
But where Upstock truly excels is equity plan communication, or the process of enabling everyone to truly understand its mechanisms, components, conditions, and value. Setting up an equity plan system from scratch is difficult enough, but helping workers understand why it is good for them may even be harder without the right tools to effectively explain and communicate.
Disclaimer: The contents of this article are for informational purposes only and should not be used as a substitute for professional legal or financial advice. If you have any questions, please consult a qualified professional.