Ensuring that employees own equity in the company is part of the value distribution process and a powerful tool to align all stakeholders in a company.
Working for startups should give employees the ability to participate in the upside, with the possibility of a big return if the company succeeds.
That said, don’t make any confusion with your salary and here are some key difference you need to know.
In healthy startup ecosystems, employees at fast-rising startups should be rewarded and have the ability themselves to become entrepreneurs or business angels afterwards. This lead to a virtuous investment ecosystem.
But today too many employees in European startups do not benefit from their companies’ success in this way. Very few of them have made meaningful fortunes, which prevents them from reinvesting and then helping create an exponential effect on the early stage market. …
In our last article we outlined the main differences between the 2 financial components of your compensation package as a startup employee: salary vs. capital.
Today, prior to further explaining how equity incentives work, we’d like to give you an overview of the 4 basic pieces of knowledge to master when it comes to equity incentives.
The capital of a company is essentially composed of people, individuals or companies, holding a stock or an option: the shareholders and stakeholders. The capital is the motherboard of a company as it is the basis of 2 strategic components:
Working in a startup obviously has its pros and cons. The most important components of your pay package as an employee are salary and equity. If you are working or want to work in a startup, you should understand both.
Some people are attracted by the startup life because they want to work in an innovative environment and/or because of the project itself and the mission of the company. In any case, they want to have a bigger impact than in a traditional company.
In Europe, especially in less mature ecosystems, the idea of working in a startup is also associated with common stereotypes like having a ping-pong table at the office, no dress code, no hierarchy… But such myths–even if they are not completely wrong–should be balanced with a practical understanding. To give you a brief overview: working in a startup is pretty risky, you need to be flexible, and you need to work super hard. The reward is that you’ll get some benefits that you won’t have in traditional companies. …
We assume that some of the 1,500 employees became millionaires. Pretty obvious with such amazing and improbable amount.
They didn’t have a shared lottery ticket, or at least not the kind you are thinking about.
Those instant-millionaires had two characteristics in common that made them rich:
Drafting a good employee stock options plan (ESOP) is one of the best ways to recruit talent. This will empower employees by aligning their long-term interests with your vision and the company’s mission.
But drafting a good plan is not that easy. It involves knowledge of the law, taxation, finance, and human resources, and it’s rare to find someone who has expertise in all these subjects. While raising funds is heavily discussed in the startup world, employee equity is largely set aside. There are some likely reasons for that. …
As Nicolas Colin said in his newsletter “employee equity is critically important because startups are driven by increasing returns to scale. […] [But] because there are so few exits, stock options remain a very abstract concept for most people working in tech startups in Europe.”
Sharing company capital with employees requires indeed specific knowledge in human resources, law, tax and finance in order to get a clear understanding of how it works. It is an art rather than a science, and entrepreneurs thinking about their ESOP need to answer a lot of questions such as:
“After years of hard work, I had the chance to monetize all the stock options the company granted to me and got enough to buy an apartment back in France. That was a great upside for all those years of commitment.”
Startup compensation has two pillars: salary and equity. Salary pays your day-to-day work, equity through an employee stock options plan (ESOP) can be a long-run game changer.
Almost all tech companies provide employee ownership through an employee stock option plan (ESOP) in order to align its stakeholders’ interests, including those of its employees. But only a few employees really understand what they get and so the desired effect of motivating people to maximize their involvement never really happens.
Why? As a founder, you know that making something REAL isn’t about administrative paperwork but about that moment of clarity when something becomes self-evident. An ESOP doesn’t mean anything for your employees so long as you don’t make them truly understand what it is.
I learned that through my experience at La Ruche qui dit Oui ! (LRQDO), a French tech company enabling a fair food system across Europe by helping groups of consumers to buy groceries directly from producers. When I joined the company following its series B round of funding, one of my first tasks was the implementation of the company’s ESOP for all employees, all across Europe. …