The episode in 60 seconds
Getting employee participation plans right, according to Yoko Spirig.
- Not taking participation plans seriously in the early days and postponing it for later, therefor losing out on the motivational benefits for early employees
- Not being transparent and structured about participation plan, which can lead to a feeling of haphazardness among employees
Why participation plans are important
- As a startup, you’ll often struggle to compete with established companies on the salary front. Stocks are your secret weapon to attract top talent in spite of limited cash.
- Holding stocks factually makes the employees co-owners of the company. It’s easy to see the positive influence on mindset and attitude that co-ownership can bring.
Participation plans in Europe vs the US
- Employees in Europe hold less than half of the company stock than their US counterparts. This is among other things due to lower awareness of the value of participation plans amongst the European workforce.
The mechanics of participation plans
- How much stock should you reserve for employees? Generally good bench marks are 5-10% in the early stages of your company and up to 20-30% in later stages
- Who should receive stocks? Ideally, everyone. Large companies like Google still offer stocks to every new employee which joins the company. Long term employees should get regular “refreshers” i.e. more stock added to their portfolio
- How do you decide who gets what? There are 3 dimensions to get you started. Depending on your priorities and culture, you might to weigh them differently
- Seniority level: more responsibility means more stock
- Employee number: early joiners took a higher risk when betting on your company and should be rewarded accordingly
- Tech vs non tech talent: the truth is, tech talent is much harder to compete for in today’s labor market, so it’s common to offer them larger participation options
- What is vesting and why is it important? Stocks are usually not transferred to employees in bulk all at once but in smaller tranches over a period of time. This process is referred to as vesting. A 4 year vesting period for example means that the entire pool of assigned stock for an employee will be distributed to them over a 4 year period. It’s advisable to make the tranches fairly small (i.e. distribute stocks every month rather than once a year) in order to avoid a situation where you give a large portion of stock to an employee and they leave the company immediately after.
Communicating participation plans to employees
- Be aware that many of your employees might not have heard of participation plans before and aren’t familiar with the ins and outs of venture capital. Therefore, take the time to explain and frame the participation plan for your employees as a way to become co-owners of the company
- Create a table that clearly shows who will receive how many stocks and based on what criteria. This will prevent employees from feeling treated in unequal ways.
Pitfalls of participation plans
- When you are short on cash, it’s tempting to think you can make up for a low salary with stocks. This is not a fair way to treat your employees as you are forcing them to bet their financial security almost entirely on the success of your company.
- It may also be tempting to oversell the value of participation plans to your employees. While it’s certainly not wrong to strive for a unicorn valuation, the truth is most companies will never get there and you should be honest with your employees about this.
- Be aware that in Europe, every country has their own rules for how employees participation plans work and how they are taxed. Consider getting some legal help when you want to internationalize.
“You shouldn’t let equity plans be an excuse not to pay your employee a decent salary.”
“I think it’s the immaturity of the European startup ecosystem that makes it not take employee participation plans seriously yet.”
If you want to listen to more conversations with Yoko Spirig, check out our story episode with her.