The CFO’s guide to employee equity & ownership
Companies that are growing fast, raising money and welcoming new employees can already count themselves as successful. The founders and early employees have done many, many things right.
But as companies expand and become more complex organizations, some processes get harder rather than easier. Equity and ownership is a perfect example.
Among two or three co-founders, equity is a short and fairly simple discussion. A few years down the line, though, you have external investors who come on board with preferred shares. You've got early employees and new hires, who need to be treated fairly while reflecting how far they've contributed to the company's development. And you may have started onboarding employees in new markets, who will have different regulations governing their share options.
Even though equity can quickly get very complicated, the benefits of offering share options to employees are clear: a more motivated team, better retention of top talent, and a fair reflection of the work everyone puts in to building something big.
So as the leader of the finance function, how should the CFO deal with employee share options? How should information on equity be shared with the company? And how do you start to build a framework for sustainable long-term employee ownership?
Benchmarking employee equity: where to start?
At least in the technology sector, the idea of giving employees ownership in companies has become mainstream. Management teams not taking this step are increasingly seen as the outliers, with negative consequences for employer branding.
But deciding to offer employees share options is just the start. How much equity should you offer to employees? And how should you deal with vesting schedules?
Let's start from the beginning. In the United States, tech companies have been awarding employees share options for decades. There are settled precedents on roughly what you should offer a senior software engineer at Series A stage, or a business development manager at Series C.
In Europe, it's not quite so easy. Because the European tech ecosystem has seen fewer exits, and because the cultures of ownership in European tech markets have had less time to develop, there are no set guidelines for what companies should offer employees at different stages.
Ledgy's own research suggests that startups in different European markets usually offer employees somewhere between 10% and 15% of the company's total equity. In general, employee option pools are lower in Europe than in the US – potentially giving an advantage to tech companies on the other side of the Atlantic in the war for top talent.
As well as the size of the total pool, CFOs need to establish best practices for how share options should vest over time. A standard model is for share options to vest evenly over a total of four years, with a 'cliff' that states employees have to stay with a company for 12 months before being entitled to any options.
However, there are lots of other models for vesting, such as 'back-weighted' models that vest 10% in the first year, then 20%, 30% and 40% in subsequent years.
Once you have aligned on the size of the pool and on vesting schedules, you have the makings of a sustainable ownership plan that can support the company as you scale.
Education: bringing ownership to life
By investing in building an employee equity plan, you are committing to spending time and money making sure all stakeholders get fairly rewarded for their work. So why do so many companies issue a brief announcement to the team, spend a few minutes talking about equity in annual reviews, and expect employees to remain consistently engaged and motivated at all times?
To make sure the finance team's work doesn't go to waste, CFOs need to invest in something else: education for the whole company. Let's recap the key messages that might be needed in different important conversations.
The CEO and board
Although many finance leaders enjoy diving into the detail of equity plans, you need to make sure that board-level discussions cover the big picture. Articulating how your equity plan compares to competitors and industry standards is a good way to quickly communicate value.
Describing how the employee equity plan fits in to the broader compensation strategy can also be helpful. Even today, many leaders still think first about salary when compensation comes up. In high-growth companies, equity is absolutely core to employees' packages, especially when you're competing for talent against bigger companies who can offer higher salaries.
Employee equity doesn't just depend on the CFO. Many teams, especially people / talent, operations and legal, contribute to the scoping and delivery of employee ownership plans. CFOs should work closely with team leads to determine how the company deals with equity on a practical basis. This might be discussing the benefits of equity as an employer branding tool with the talent team, or working with the General Counsel to establish the fairest way to roll out options in a new market.
The whole team
Communicating regularly with all employees is at the heart of a scalable, sustainable equity plan. Invest in creating resources that make the basics clear to all employees, being sure to cover any terms or circumstances pertaining to your company that might be more unusual.
Transparency is another vital component to building an equity plan fit for the future. Are you creating best-case, 'standard' and worst-case scenarios when conducting financial planning exercises? If so, think about which details from these exercises you could share with the whole team. Try to open up other metrics like valuations to your employees, letting the team do more than just view the number of options they have.
Some Ledgy customers use updated valuations as part of the internal communication plan for company milestones like new funding rounds. These tactics are a great way to make equity seem real, and to encourage the team to engage with their equity on an ongoing basis.
Along the way, make sure to create communication channels for questions and concerns on equity. People in different countries might have varying attitudes and expectations towards equity. And discussions on share ownership are likely to bring up some technical concepts that might be new to employees.
Making yourself available to answer queries will ensure no-one feels alienated or left behind as you grow.
Beyond spreadsheets: how to get employee equity right
As company ownership grows in complexity over time, more and more CFOs come to understand that equity cannot live on enormous, unwieldy spreadsheets in perpetuity. The risk of making errors in transferring data has real financial consequences if not spotted. And the administrative work involved in maintaining everything yourself is a major source of pain.
But a future of manual misery is not inevitable. Software products exist that can save you and your team significant time, empowering all company owners with access to more information on equity and ownership. In case you aren't sure what exactly to look for, here's a quick checklist that recaps the major advantages of equity management software over spreadsheets.
Integrations with other platforms and providers. Many custom-built products integrate with other pieces of software built for HR, talent and legal teams. Integrations make moving data easy and prevent duplication errors.
Helpful features for everyone, not just power users. Make sure to invest in equity management software that focuses on creating helpful dashboards for your employees as well as you and other power users. When it comes to their share options, the more resources employees have the better.
Readiness to support international growth. As your company scales into new markets, it's likely that your equity will have to evolve. New employees may need different kinds of grants and options, with legislative differences potentially creating real headaches for the finance function. Software that supports companies across jurisdictions is a critical advantage that saves you time and money.
Automation of key processes. Managing equity and the cap table is one thing, but if you have to use different providers to send contracts and share email communications, the work still adds up. Look for software that brings these important features into one place, helping you deliver an end-to-end service for the whole company.
Managing employee equity is a journey that starts from the moment your business idea takes shape. It is a long-term initiative, and when executed well it has serious positive effects for your company.
Happily, there are now tools that make a CFO's life much easier when it comes to equity. But the biggest impact comes from a consistent emphasis on education. Making sure the whole company knows the basics of equity and share ownership – from the boardroom to the ‘shop floor’ – pays dividends.
Employees who can access useful information on their options, on their terms, are more likely to be engaged with the mission and motivated to help you succeed. The benefits of a robust startup equity plan also makes life easier for operations, talent and legal teams.
The CFO's role has never started and ended with finance. It concerns strategy, communications, and culture. Equity is one way for the CFO's job to materially impact everyone across the company. Stick to spreadsheets and you lock important information away from people. Do equity right, and you're laying the foundations of long-term success.