- Equity shares are a popular benefit for pre-IPO companies. But many employees don't understand how they work.
- Candidates value clear communication about equities. Educating candidates about the benefit can help with recruitment and retention.
- Recruiters and hiring managers need to be educated, too. Workshops and interactive tools help ensure that hiring managers can effectively communicate equity options during interviews.
When offered stock options or equity shares as a benefit for a startup job, some candidates jump at the offer without gathering more information, while others avoid the option altogether.
Both issues can be remedied with greater communication from potential employers about the benefit, observers say.
For fledgling companies that are growing and not yet publicly traded, equity can be appealing for employees looking to get in on the ground floor — and a popular benefit offering for startups focused on conserving cash. But many potential employees don't understand the true value of shares, the implications of vesting or the best practices for effectively utilizing this benefit.
The large majority of startup employees have said that stock options are a major incentive for choosing to work for a certain company, with almost all noting that education about those options is vital when it comes to wanting to work at a company and feeling valued there.
“Transparently communicating the value and potential of equity shares during the interview phase is essential for organizations, especially those planning a near-term IPO,” said Ryan Cameron, senior principal with Mercer. “That communication attracts top talent, retains key employees, motivates teams and builds trust.”
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Offering equity as a benefit can create a greater sense of ownership among workers and increase loyalty by incentivizing longevity through vesting options.
“If organizations fail to communicate that value effectively, they may be missing out on recruiting and retaining the critical talent needed to drive a successful IPO,” Cameron said. “By showcasing the unique benefits of equity shares, organizations position themselves as desirable employers and create a culture of shared success.”
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For employees, accessing equity shares in a growing company can lead to significant returns.
“If employees see potential in the company’s growth, and if they’re motivated to see the company succeed, they will partake in the benefits of that success in the long term,” said Justin Sun, senior rewards manager for Expedia Group.
That starts with an understanding of the benefit. Businesses should clearly communicate the following information:
- The value of stock options, beyond number of shares — the possible dollar value of those shares based on potential IPO prices, or their percentage of the company. “It’s helpful to employees to understand, especially if the startup is in early stages, what percentage of the company would be owned by the employee, because the younger the company, the more risk that is involved,” Sun said.
- The investment required by employees to exercise their options, based on the estimated grant price at IPO and the number of shares they are being offered.
- When a candidate can expect to see receipt of the value, based on the company's sense of its IPO timing.
- Vesting schedules and other restrictions on certain options. “Sometimes candidates are not aware of the fine print behind the equity shares they receive, such as clawbacks wherein the companies can take back vested shares from employees when they leave the company,” Sun said.
- What will happen to unvested awards at the time of IPO or transition — if they automatically vest or stay unvested.
- What happens to the reward if the company doesn't issue an IPO or get acquired on schedule.
- Expiration dates involved with stock options that would render them worthless if they are not exercised by a certain date, such as a 90-day deadline to exercise or forfeit options after leaving a company.
- What it means for employees if stock prices at the time of IPO are lower than the grant price. “This makes the option, at least temporarily, underwater,” Cameron said. “One common mistake is neglecting to communicate the downward risk, which can lead to increased distrust during challenging times when unity is essential for success.”
Actively Educate Hiring Managers and Keep Communication Going
Educate not only candidates, but also the hiring managers and recruiters directly communicating with them when creating a greater understanding within a company about equity shares.
“Conducting communication workshops has proven successful,” Cameron said. “Through interactive discussions and Q-and-A sessions, recruiters and hiring managers can develop a compelling message to attract top talent and align their teams with the company's vision.”
While companies can't offer direct advice to candidates about their specific financial situation, they should provide access to resources, educational tools and third-party professionals who can assist employees.
Ongoing information-sharing is vital as well — businesses should continue to communicate details about equity at key times, such as leading up to IPO, and not just at hiring.
Effective education around equity yields benefits for both employers and employees at growing companies.
“Employees need to understand how stock options work in order for them to value them,” Sun said. “One of my favorite stories is about a barista who was among the first to be employed … in pre-IPO days who was able to use the shares she received from the company to help pay off student loans, including putting a payment down on their first home. These stories help bring to life for employees the value of their equity and ways in which they might use equity to achieve their personal life goals if they continue to invest in the company's growth.”
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