How Startups Can Survive During a Downturn Using Equity Compensation

John Anthony Almerino

August 17, 2022

How Startups Can Survive During a Downturn Using Equity Compensation

March 1, 2022

How Startups Can Survive During a Downturn Using Equity Compensation

During challenging economic times, there is a stronger need to build a winning team and culture with the aim of not just surviving, but actually thriving.

  • Equity compensation allows companies to save cash which is important to preserve during times of economic uncertainty.
  • Workers that receive equity are more likely to stay with the company through thick and thin.
  • Keeping morale high during challenging times is important and equity rewards allow you to motivate your team to continue striving.

We’re all feeling the effects of rising prices of goods and services. The global economy is currently experiencing a period of slow growth and increasing inflation. Although experts have not yet declared that we are now in a recession, there are several signs that we are already in one.

The United States National Bureau of Economic Research (NBER) lists off symptoms of an economic recession. These signs include increasing unemployment rates, inflation rates and unexpected global events. Currently, we are seeing many of these signs. 

Startups, in particular, have been hit hard by previous recessions and many didn’t survive. In difficult economic times, where cash is considered king, there’s one unexplored and unorthodox idea that involves worker equity that could potentially mitigate the devastating effects of a recession.  

Startups during a recession or economic downturn 

But before that, what does a recession or economic downturn even mean for a startup or new business? Well, anything but good.

During a severe economic downturn, businesses and startups may have a hard time staying afloat. A recession means fewer sales, which leads to fewer profits and a reduced cash flow. 

To cut down on expenses, businesses might choose to lower employees’ salaries and benefits. These actions, however, could have a detrimental impact on the team’s morale and the company's future. 

What should startups do to survive an economic recession?

There’s a lot of things that startups could do like implementing measures to cut costs or expenses and increase savings. 

However, for this blog post, we will specifically talk about how startups, by cultivating and maintaining strong teams through equity compensation, could not only survive a recession but also thrive in spite of it.

Find alternative ways to compensate your employees

A recession is a difficult time for both business owners and employees. During recessions, most companies would choose to lay off employees in order to minimize expenses and save cash. 

Some of them would even choose to let go of “non-essential” team members or ask them to agree to a drastic pay reduction to increase the startup’s runway. However, this is not necessary.

One possible solution is to incorporate equity as part of a team member’s compensation package. In fact, equity compensation could be worth more than cash in the long run if the future company succeeds. A good equity plan addresses the need of extending the company’s runway without compromising the adequacy of employee compensation.

While some might argue that most workers would just be happy to keep their jobs in a recession, this fails to consider the massive benefits of a strong and loyal team during a period of crisis.

Cultivate team member loyalty

A good and loyal team is extremely important to a startup’s survival and success. Equity compensation enables this through both emotional connection and financial motivation. 

The more straightforward reason is based on economic incentives as workers or team members who have an equity plan with the company, have a stronger reason to remain with it especially if the plan has not yet vested. Because if they leave too early, they might forfeit their right to their rewards under the equity plan.

However, there is also the emotional or psychological component to it. Since equity compensation technically converts workers and employees as part-owners of the company, this helps create an ownership mindset among them and encourages company loyalty. When workers and employees start to think like owners, they want what is best for the company and become more loyal to it. When someone owns something they identify with it. Whatever someone identifies with, they naturally want to improve. This is not a linear function, it is exponential. Each day's actions compound the company's success when workers are looking out for the long term success of the company.

Build a stronger sense of alignment within the company

Worker-company alignment ensures that everyone shares a common goal and destination no matter how hard the times may be. If you take the opportunity to build trust within your team during these challenging times, it will definitely pay off in the long run.

By offering your team members equity as a reward, you can get them invested in the company's long-term mission and vision. Employees who have equity in the business will start to think of ways to contribute to the successes of the organization. This is very crucial, especially during economic downturns where everyone’s contribution matters.

This is what we all do at Upstock. We have created a platform that allows startups and companies to set up a top-shelf equity compensation system for their team in a matter of minutes. We can help you unlock your team’s potential by taking advantage of the motivating power of equity rewards and confidently navigate these uncertain times.

Want to know how? Book a demo here.