A Survey of Equity Refresh Programs
In their earliest stages, most startups don’t have a refined strategy for how they’ll refresh their employees’ equity in the future. Equity grants typically vest over 4 years — why should you worry about refresh grants when your most tenured employee has only been at the company for 4 months?
But once your company has existed for a few years, having an equity refresh strategy becomes critical. Even if your valuation is growing quickly, employees who’ve gone through 40–60% of their initial hire grants may naturally get anxious about whether more stock is on the way. To retain your team, you need to design and implement an equity program that will systematically reward and incentivize your team.
There are several parameters to weigh when designing an equity program: How aggressively to reward high performance, how much dilution you can accept, how easy the program is to administer, or how much upside (or risk) to expose your employees to. It’s important to weigh these factors in designing your strategy. Below, we’ve documented a few equity refresh programs in the industry for inspiration. We hope that this will be a helpful guide as you design your own:
Wealthfront pioneered one of the most widely adopted equity plans. In this program, employees receive a large equity grant upon hiring, and tenure-based refresh grants that are ¼ the size of their initial grant starting after their second year of employment and continuing every year thereafter.
The Wealthfront plan is great because it’s simple to administer and standard in the industry. The plan ensures that employees receive regular refreshes, ultimately vesting a consistent average amount of stock. The most significant disadvantage of the system is that it has a discontinuity around year 5 — as an employee’s initial hiring grant (which is much larger than subsequent refreshes) rolls off, the amount of equity that they vest in a given year drops significantly. This effect can be reduced by stock appreciation or promotions, but has the potential to incentivize long tenured employees to actually leave the company.
Carta uses a similar system to Wealthfront, except that their refreshes begin vesting two years after they are granted. Carta also has mechanisms for performance-based grants, allowing them to incentivize top performers.
The biggest advantage of this system is that it evens out employees’ vesting — it prevents dropoffs in equity vested (particularly in year 5 of an employee’s tenure), and gives employees upside when the company’s stock rises. The biggest disadvantage of the Carta system is that it’s non-standard (as of now), and requires more training and overhead to administer.
Google has allegedly updated their initial equity grants to a front-weighted schedule for recent offers (eg, 33% in years 1 and 2, 22% in year 3, 12% in year 4). Employees then receive refresh grants starting after their second year, and the combination of front-weighted hiring grant + subsequent refreshes leads to a consistent amount of value per year without points where vesting drops dramatically.
Google’s equity plan is quite employee-friendly, in that it allows employees to vest significant equity in their first year or two of employment. The main downside of Google’s program is that it can cause more dilution if employees leave your company quickly. This is especially problematic as this program arguably creates incentives to leave the company after a year or two in order to make a quick buck. This doesn’t matter for Google in practice, but it might cause more dilution than desired for a smaller startup.
There are reports that Lyft, Coinbase, and others have recently moved to an annual grant system. In this equity program, employees receive a new equity grant annually that vests over a single year. For example, in 2022, you might receive $100k in Lyft stock that vests quarterly throughout the year. In 2023, you’d receive a $110k grant, and so on.
In addition to being simple to administer, there’s a certain inherent fairness to this program — both Lyft and Coinbase have liquid stock, and this equity program essentially treats stock like cash and dramatically reduces the variance of the equity value. If the stock goes down, it doesn’t matter as much to employees — they’ll still be eligible for a fresh $110k grant the following year. If the stock goes up significantly, however, employees don’t get to participate in nearly as much upside.
This type of equity program is a double edged sword. It protects employees from significant downside risk — for example, it can be devastating to receive a four year grant that immediately loses half of its value. On the other hand, this strategy significantly reduces the upside that employees can realize. Many small (or even large) fortunes have been made at startups when employees benefited from 4 full years of equity appreciation on their initial grants, and this program essentially takes that scenario off the table. This works fine for public growth companies like Lyft and Coinbase, but misses one of the most significant incentives for startup employees.
We hope that this survey of equity refresh strategies in the industry is helpful as you’re crafting your team’s equity program. We encourage you to look at the pros and cons of each strategy, and use them to design a program that works for you and your company.
Originally published at https://www.aeqium.com.
