Why FindHotel offers share appreciation rights (SAR)

One way that sets FindHotel apart from other fast growing startups is our approach to funding and value creation, most specifically the role of financial investors in the company and the value captured by our team members via the stock appreciation rights program (SAR) → more on that in the second part of the text.

Where are the VCs?

So far in our journey, financial investors did not play a role. We spun off the company from an ‘affiliate product’ which allowed us to save before investing in R&D of our own product and eliminated the need for seed investors. Since then we have stayed pragmatic, building solutions that helped customers save money and using these to reduce our customer acquisition costs, which allowed us to scale the company via its own cashflow. That enabled us to scale nicely and we recently crossed the 2M bookings yearly mark, aiming to grow that 5X through 2023 (more on how our product differs and enables growth here).

We still plan to add financial investors to FindHotel later on, as we aim to build FindHotel as a public company in the future (that is, once our scale would allow and we have built enough assets to be able to continue to grow in a rather predictable way that the public markets appreciate).

The path we took to financing means that even when financial investors do join, they won’t own the majority of the company. Instead, that would be the founder & team.

20% of the company value are allocated to the team

Early on in our journey I realized that as a single founder I had more than enough equity & control myself, and understanding the math of marketplace companies (where most of the value is created at scale), I thought it would make much sense to have a significant allocation for employees for two main reasons:

1. I wanted to instil a true sense of ownership and have it go as widely as possible across the company. Ownership brings with it a much more authentic work culture, helps elevate trust and makes it easier for managers to delegate key decision making and build alignment while reducing waste and eliminating short-term thinking and fake value creation. I believe that this mindset also helped us be the fastest company in travel to recover from the Corona crisis.
2. I believe in a relatively pure sense of capitalism where value generated should be as close as possible to value earned, adjusted to risk. In real life our salaries are often driven more by market forces such as cost of living or competition, but equity follows the value creation path much more closely. If we were to build significant value as a company, everyone who joined us for a key portion of the journey would enjoy a significant upside, often a life changing one.

There are few caveats in this path to keep in mind:

1. While value growth is relatively consistent (we have seen our internal yearly valuation grow 71%-83% per year in the past 4 years, for an average of 76% per year), in financial terms that means most of the value is generated in later years (in absolute € terms, growth between 2020 & 2019 is higher than growth between 2019 & 2016). This truth intensifies when changing from the accounting driven valuations we use today to the more forward looking financial valuations a growth company close to the public market would use (that’s where we’d often see the ‘hockey stick’ graph shaped enterprise value growth).

2. The ride to an IPO takes a long time, a feeling that is magnified when we are surrounded with a funding environment that generates unicorns out of ‘launched 18 months ago’ companies. Time is a difficult trade-off to make as our lives are short, our young years even shorter and few of us plan to have a technology career for 30 years, making 5 years type of journeys an awful a lot to ask for an uncertain outcome. But company building is not a 0 and 1 type of gamble and 2yo unicorns are usually +90% VC owned, with little upside left for employees and liquidity depending on funding environments remaining frothy which no one can control. On the other hand, companies built from solid foundations find ways to overcome many challenges and end up being more rewarding in the long run and across other valuable aspects such as impact, culture and long-term value creation. Thus, the real trade-off is often ‘brand name + short term comp’ versus ‘impact + long term comp’, with the latter having lower certainty on aspects such as ‘value of my shares’ and higher certainty on the experience and impact involved.

3. One advantage of having financial investors in the company is that they ‘force’ leadership teams to aim for a significant value creation. Unicorn thinking is VC thinking as this is where their payoff lies. Non-Funded founders would actually be financially smart to take a less risky path and seek a €20M-€100M exit if that were available. I committed to the team early on that my goal is to build a significant public company and have remained true to that promise, but it does not mean it is the most rational financial choice for me. On the other hand, it is the way to enable financial freedom for many of our team members who would stay for the long ride, while an early exit would leave them with a faster outcome but hardly ever a life changing one.

I am joining FindHotel, what should I expect from my SAR?

Describing our fictional developer Laura that joined in the summer of 2020 as Full-Stack customer value finder, this is what her experience looks like:

1. She joined on 01/06/2020. Upon joining she has not yet been awarded SAR, but when she does her vesting would work with 01/06/2020 as starting date, and the company base value would be the one of 2019.
2. On 01/06/2021 she reached a 1y anniversary at FindHotel, enabling her to join the SAR program. She received 50 SARs which would vast across 4 years (SAR allocations per new joiner drop as the company grows, so the average joiner in 2022 would be awarded a smaller allocation than this example). By the time her SARs are awarded she has already vested 1/4 SARs as she has been with us for a year (update: this has changed in Q4 ’21 to a SAR award upon joining, vesting schedule remains the same).
3. Once a year the company updates its internal valuation, meaning that by September 2021 Laura knows that the value of her full SAR appreciation is now €11.5k. Not bad but not life changing either! (yet).
4. Six months passed and Laura has been doing really well in her team and she is now an engineering lead. She has been awarded another SAR, this time 75 SARs, again with 4 year vesting but Laura is happy at FindHotel and is not considering to leave. Her SAR value continues appreciating and by 01/01/2023 it is worth €129k. Not yet a house in Amsterdam but certainly a downpayment on one.
5. Meanwhile (January 2024) the company is starting to get recognized as another Amsterdam travel success story. Not the highs of €100Bn Booking.com, but a true gem with 300 employees and +10M customers in 2023 alone. Now Laura knows that the IPO we talked about for years is imminent, and when that takes place in September ’24 she converts her SAR for shares, netting her €737k. Now that buys you a nice place even in Amsterdam!

Throughout this journey, Laura did not have to pay anything to exercise these rights. They were illiquid and were not considered shares, so no taxes were levied. She had a simple Google Sheets calculator formula which she trusted, a management team she knew is committed to creating long term value, and a structure that her entire team enjoys which creates alignment and a clear sense of ownership.

Her leaders knew that they are not the only ones with a positive financial outcome from the company’s successful journey, but that their entire teams have a real upside too. The IPO event was not just a very nice photo-op, but a true celebration as many team members will have seen years of hard and effective team work lead to a great financial outcome to so many, which we could now share with the wide public.

That’s our vision for value creation at FindHotel, and while all the figures I mentioned are fictional, they are also very realistic and in the long term they are even understated.

As advice to any high impact employee out there: you should demand nothing less from any company you go to, as your contribution is ≥ than that of a financial investor and you should opt to take less salary for long-term upside in a company you believe in. More on that from the Pragmatic Engineer blog which explains in detail the wild card upside that stock options in startups are for contributors joining a successful company.

Originally published at https://blog.findhotel.net on July 5, 2021.