Startups Ask: How Do I Use Equity To Get Better Candidates?‍

Upstock Team

Startups Ask: How Do I Use Equity To Get Better Candidates?‍

June 19, 2023

Startups Ask: How Do I Use Equity To Get Better Candidates?‍

Recruiting top talent is the lifeblood of any venture, but for startups strapped for cash, traditional salaries can feel like a heavy anchor. So, how do you entice brilliant minds to your ambitious journey when you haven't yet hit unicorn status? 

That’s where equity compensation comes in handy; a potent tool that lets you compete with tech giants and woo your dream candidates. It offers them a chance to be part of something bigger, to share in the potential rewards of your success. 

Ironically, this isn't a problem that you can throw your money at to solve. Rather, it’s about creating a compelling proposition that resonates with ambitious individuals who see the potential in your venture.

Does Equity Make You More Attractive Than Cash?

Absolutely. While a competitive salary is essential for meeting basic needs and affording a comfortable lifestyle, equity offers something far more alluring to the ambitious: the potential for exponential growth and shared ownership in the future. 

Yes, cash provides immediate gratification, but equity speaks to a deeper desire: the chance to be part of something bigger, to build something meaningful, and to reap the rewards if it all takes off.

Think of it as this: Cash buys stability, while equity fuels dreams. A talented candidate, especially at the early stages of their career, is looking for more than just a paycheck. They want purpose, ownership, and the thrill of being on the ground floor of something potentially game-changing. Equity gives them just that. It aligns their interests with yours, making them more invested in the company's success and more likely to go the extra mile. They don't just become employees; they become co-owners, champions of your vision, and active participants in shaping the company's future.

The allure of equity goes beyond just potential financial gain. It's about the prestige of being an early-stage pioneer, the satisfaction of building something from the ground up, and the pride of being part of a team that could change the world. For talented individuals who value intellectual challenge and impact over immediate financial security, equity becomes a powerful motivator. They see it as a badge of honor, a symbol of their belief in your vision, and a commitment to the journey ahead.

Of course, the value of equity depends on several factors, including the company's stage, potential, and prospects. But even in pre-revenue startups, where a large salary might not be feasible, equity can become the currency that attracts and retains top talent. It's a way to say, "We believe in you and your contribution so much, that we're willing to share a piece of the pie, even before it's baked." That kind of trust and investment in their potential can be incredibly motivating for ambitious individuals.

How Much Equity Should I Offer, Then?

The magic number doesn't exist. The amount of equity you offer should be a carefully considered dance between several factors:

✔ The role's importance

Senior positions with a critical impact on the company's success naturally command a higher equity stake (think 1% to 2%) compared to junior roles (0.2% to 0.5%).

✔ Candidate's experience and expertise

A seasoned expert with a proven track record deserves a more significant share (maybe 1.5% to 3%) than someone fresh out of college.

✔ Company stage and valuation

Early-stage ventures with limited resources might offer smaller percentages (0.1% to 0.25%) compared to established companies with higher valuations (0.5% to 1%).

✔ Market competition

Research what similar companies in your industry are offering for equivalent roles. Stay competitive, but don't get into a bidding war that jeopardizes your future.

But I'm Pre-Revenue. Is Equity Still Worth It?

Absolutely! Early-stage startups may not have a salary to compete with, but equity becomes even more valuable in this scenario. It's a chance for talented individuals to be ground-floor pioneers, shaping the company's future and reaping the rewards if your vision takes flight.

What Are My Options?

Stock options are the classic equity tool, but in your startup arsenal, you have a variety of weapons to choose from. Here's a closer look at some alternative options:

1. Restricted Stock Units (RSUs)

These are basically shares of your company granted to employees with a vesting schedule. Unlike options, Restricted Stock Units (RSUs) automatically vest over time, giving employees ownership of the shares without needing to exercise them. This can be a simpler and more direct way to reward employees with immediate ownership and potential for future growth. 

Consider RSUs for key hires you want to incentivize long-term and who value the immediate stake in the company.

2. Phantom Stock

This is a virtual stock that grants employees the right to a cash payout based on the company's performance at a predetermined date. This can be a good option for early-stage startups where the stock price is still uncertain. Employees still get a chance to benefit from the company's success without the complexities of managing actual shares.

3. Performance-Based Stock Units (PSUs)

Tie the rewards to achieving specific goals, like exceeding sales targets or launching a new product on time. This aligns employee interests with company goals and incentivizes them to go the extra mile. PSUs can be a powerful tool for driving high performance and fostering a culture of accountability.

4. Convertible Notes

These are loans made to your company that can be converted into equity at a future date, typically during a funding round. This can be a good option for attracting early investors who believe in your potential and want to get involved before the valuation skyrockets.

5. Deferred Stock Units (DSUs)

These are shares granted to employees but not issued until a future date, often after they leave the company. This can be a good way to retain talent and incentivize employees to stay vested in the company's long-term success.

Is Equity Enough to Attract Top Talent?

While equity is a powerful tool, it's not a silver bullet. Top talent also seeks a stimulating work environment, a strong company culture, and growth opportunities. Make sure you can offer a compelling package beyond the equity, showcasing your vision, values, and the exciting challenges that await them.

How Do I Communicate the Value of Equity?

Simply handing over a stock option agreement won't unlock the magic of equity. Communicating its potential and aligning it with your candidate's aspirations is imperative. Here's how to effectively do so:

1. Quantify the Potential

Don't just throw around percentages. Translate the equity stake into real numbers based on current valuation and projected growth. Show them how their contribution can impact the company's future value and, consequently, the potential value of their shares. Use financial models and hypothetical scenarios to illustrate the potential upside, but be realistic and transparent about the risks involved.

2. Tell the Story of Ownership

Explain how their equity stake translates into a real voice in the company's future. Highlight opportunities for involvement beyond their core role, such as participating in decision-making, offering input on strategy, and shaping the company's culture. Make them feel like valued partners, not just employees.

3. Explain the Vesting Schedule and Exit Strategies

Transparency builds trust. Clearly explain the vesting schedule, outlining the timeframe for ownership to fully mature. Discuss potential exit scenarios, whether through acquisition, IPO, or other liquidity events. This helps them understand the timeline for potential financial gains and the different ways they can benefit from their equity stake.

4. Make it Personal

Tailor your communication to the individual candidate's goals and aspirations. Are they driven by financial freedom? Highlight the potential for significant financial rewards down the line. Do they value purpose and impact? Emphasize how their contribution will shape the company's success and leave a lasting mark.

5. Use Visuals and Storytelling

Numbers can be dry. Use charts, graphs, and hypothetical scenarios to bring the potential of equity to life. Share success stories of past employees who benefited from the company's equity program. This adds a human element and makes the potential gains more tangible.

How Do I Manage Expectations and Avoid Equity Cliffhanger?

Be upfront and realistic about the risks involved. Equity is a long-term investment, and there's no guarantee of success. Explain the vesting schedule, the possibility of dilution, and the potential for the company to fail. This transparency builds trust and sets realistic expectations for both you and your future employees.

Indeed, using equity strategically can be a game-changer for your startup. Understanding its value, communicating it effectively, and building a compelling overall package are keys to attracting and retaining the talented individuals who will propel your startup to future success. 

Want to truly embody your company’s attractability? Offer free equity! For the first two employees you hire, Upstock gives free equity that can help boost your recruitment campaign without breaking the proverbial bank. Head over to the site or book a demo today to see how it works.

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