Equity Plans in Grown-Up Startups – Insights from New Equity Compensation Survey
24.03.2019
Much like a child reaching adulthood, startups that have grown up, having overcome the difficulties of early stages and beating the slim odds of survival, now need to deal with plenty of new challenges.
In addition to trading in the family culture and "kumbaya" togetherness for sales targets and dealing with middle management complexities, equity based compensation – mainly stock options – claim their own chunk of management attention.
After working with such companies for many years, Zviran and ESOP-EXCELLENCE recently launched (for the first time in Israel) a new survey exploring different dimensions of equity-based compensation for startups in the Israeli ecosystem (the survey is updated on a yearly basis). The survey reveals interesting market dynamics relating to three emerging focus areas:
Refresh Grants
Companies would typically make equity grants to new hires; but what about promoted employees? Employees whose original grants were diluted to dust through 3-4 cycles of fund raising? Employees that completed their vesting schedule? And what about simply providing additional grants to employees working for several years in the company?
Unlike big corporations, these mature startups typically do not have an annual grant policy in place. So every three or four years, triggered by employee turnover or new capital investment or simply due to employees requests, the discussion of refresh grants begins: Should we make additional grants? To whom? How often? At what value?
Our new survey shows that most companies provide these refresh grants to their executive team, while only half of the companies provide refresh grants to other managers and employees. In general, the more senior the position is, the higher the likelihood of receiving a refresh grant. Students, on the one hand, and members of the Board of Directors on the other, do not receive such refresh grants.
Quantifying Grants
Two methods for determining employees' equity grant values dominate the market: One calculates value based upon percentage of capital granted to employee ("% of Equity" method"), and the other focuses on the "Grant Monetary Value" (typically in the context of % of total cash package).
While big corporations discuss grant sizes in the language of money – the Grant Monetary Value method – most startups follow the % of Equity method.
Although it is our professional opinion that larger, more mature companies should progress towards the Grant Monetary Value method, our new survey shows that even grown-up startups continue to use the % of Equity method at almost twice the rate.
It's worth mentioning that there's a third (less prevalent) choice for quantifying option grants - to determine grant size according to different share price scenarios and how much the employee would profit under each such scenario.
Employees' Ability to Profit
Let's think about an imaginary company with 350 employees, $60M annual revenues, small profit margins, and high growth rates. Let's call it "Popeye Limited".
Popeye went through 3 capital investment cycles and shareholders want to realize at least some of the company's huge potential before going public. It is expected that Popeye's IPO will take place 3 or 4 years from now (depending on capital markets' state at the time).
Popeye's CEO is telling employees at the New Year feast how successful the company is, last year the company started to pay bonuses, and employees read in the newspapers how in each investment cycle the company's value increases – in last cycle Popeye's value was $650M.
Employees are becoming a bit anxious - when are they going to see some money from their equity grants? Some of them have been with Popeye since its early stages and rightfully feel like a part of the company's success. Many of them don't want to wait three or four years more years. Some have competing job offers outstanding.
Our new survey shows that more than 80% of startups do not offer employees any way of profiting before an Exit or IPO. Although such an opportunity is more common with more grown-up companies, it's still pretty rare that companies offer this. Employee morale and retention implications are obvious …
There are solutions to this issue: For example, some companies use new investment cycles as an opportunity for employees to sell their shares to investors, allowing employees to profit before an Exit or IPO.
Where the company does not act, the secondary market might offer employees the opportunity to exercise stock options and sell the company's shares to third party investors. Many companies might not like this.
These are just three examples of issues that mature startups face when trying to maintain an attractive equity plan in a very competitive labor market. It's our professional belief that only a detailed understanding of what the market does - based on such an understanding - best fit (not necessarily best practice) solutions and planning in advance will maximize a company's retention and motivation driven by equity plans.
We believe that in order to have a mature and knowledgeable ecosystem in Israel, companies should join the survey and make decisions after considering the various aspects involved.
For more information:
https://zviran.co.il/en/salary-surveys/equity-based-compensation-survey-for-private-hi-tech-companies/
About Sarig Gafny and Zviran:
Sarig Gafny is Zviran Managing Partner.
Zviran is the leading HR, compensation and benefits consulting firm in Israel.
Zviran is the only firm in Israel that is combining benchmark data, compensation & benefits in-depth knowledge and pension & employee risk benefits expertise.
Zviran provides data and professional advice for more than 450 employer customers, including Israeli and global, private and public companies from different industries.
Zviran's services include:
§ Salary and benefits surveys
§ Compensation and benefits consulting to employers
§ HR, payroll and relocation consulting
§ Pension and employee risk benefits consulting to employers
§ Pension and financial advice to high net individuals
Zviran has a strategic alliance with Mercer, world's largest HR firm.
About Odelia Pollak and ESOP:
Odelia Pollak is a Co-founders and CEO of ESOP-EXCELLENCE. Odelia has more than 15 years of experience in the field of Stock Based Compensation Plans and has vast experience in managing, consulting and operating diverse incentive plans and their related aspects to private companies as well as public companies. Prior to joining ESOP-EXCELLENCE, Odelia Pollak acted as the manager of the professional aspects of incentive plans in Investec Trust Company (Israel) Ltd. (currently U-Bank). Odelia holds LL.B. in Law and B.A. in Business Administration (in excellence) from the IDC and is a Certified Equity Professional (CEP).
ESOP - EXCELLENCE, a market leader in the trust and administration field, offering a comprehensive approach of the management, operation and supply of solutions to:
Various aspects of Stock Based Incentive Plans to employees, directors and service
Mergers and Acquisition (M&A)
Escrow to Source Code (in affiliation with Iron Mountain)
ESOP – EXCELLENCE is servicing private (from the pre-seed stages) and public trade companies around the world.
In addition to trading in the family culture and "kumbaya" togetherness for sales targets and dealing with middle management complexities, equity based compensation – mainly stock options – claim their own chunk of management attention.
After working with such companies for many years, Zviran and ESOP-EXCELLENCE recently launched (for the first time in Israel) a new survey exploring different dimensions of equity-based compensation for startups in the Israeli ecosystem (the survey is updated on a yearly basis). The survey reveals interesting market dynamics relating to three emerging focus areas:
Refresh Grants
Companies would typically make equity grants to new hires; but what about promoted employees? Employees whose original grants were diluted to dust through 3-4 cycles of fund raising? Employees that completed their vesting schedule? And what about simply providing additional grants to employees working for several years in the company?
Unlike big corporations, these mature startups typically do not have an annual grant policy in place. So every three or four years, triggered by employee turnover or new capital investment or simply due to employees requests, the discussion of refresh grants begins: Should we make additional grants? To whom? How often? At what value?
Our new survey shows that most companies provide these refresh grants to their executive team, while only half of the companies provide refresh grants to other managers and employees. In general, the more senior the position is, the higher the likelihood of receiving a refresh grant. Students, on the one hand, and members of the Board of Directors on the other, do not receive such refresh grants.
Quantifying Grants
Two methods for determining employees' equity grant values dominate the market: One calculates value based upon percentage of capital granted to employee ("% of Equity" method"), and the other focuses on the "Grant Monetary Value" (typically in the context of % of total cash package).
While big corporations discuss grant sizes in the language of money – the Grant Monetary Value method – most startups follow the % of Equity method.
Although it is our professional opinion that larger, more mature companies should progress towards the Grant Monetary Value method, our new survey shows that even grown-up startups continue to use the % of Equity method at almost twice the rate.
It's worth mentioning that there's a third (less prevalent) choice for quantifying option grants - to determine grant size according to different share price scenarios and how much the employee would profit under each such scenario.
Employees' Ability to Profit
Let's think about an imaginary company with 350 employees, $60M annual revenues, small profit margins, and high growth rates. Let's call it "Popeye Limited".
Popeye went through 3 capital investment cycles and shareholders want to realize at least some of the company's huge potential before going public. It is expected that Popeye's IPO will take place 3 or 4 years from now (depending on capital markets' state at the time).
Popeye's CEO is telling employees at the New Year feast how successful the company is, last year the company started to pay bonuses, and employees read in the newspapers how in each investment cycle the company's value increases – in last cycle Popeye's value was $650M.
Employees are becoming a bit anxious - when are they going to see some money from their equity grants? Some of them have been with Popeye since its early stages and rightfully feel like a part of the company's success. Many of them don't want to wait three or four years more years. Some have competing job offers outstanding.
Our new survey shows that more than 80% of startups do not offer employees any way of profiting before an Exit or IPO. Although such an opportunity is more common with more grown-up companies, it's still pretty rare that companies offer this. Employee morale and retention implications are obvious …
There are solutions to this issue: For example, some companies use new investment cycles as an opportunity for employees to sell their shares to investors, allowing employees to profit before an Exit or IPO.
Where the company does not act, the secondary market might offer employees the opportunity to exercise stock options and sell the company's shares to third party investors. Many companies might not like this.
These are just three examples of issues that mature startups face when trying to maintain an attractive equity plan in a very competitive labor market. It's our professional belief that only a detailed understanding of what the market does - based on such an understanding - best fit (not necessarily best practice) solutions and planning in advance will maximize a company's retention and motivation driven by equity plans.
We believe that in order to have a mature and knowledgeable ecosystem in Israel, companies should join the survey and make decisions after considering the various aspects involved.
For more information:
https://zviran.co.il/en/salary-surveys/equity-based-compensation-survey-for-private-hi-tech-companies/
About Sarig Gafny and Zviran:
Sarig Gafny is Zviran Managing Partner.
Zviran is the leading HR, compensation and benefits consulting firm in Israel.
Zviran is the only firm in Israel that is combining benchmark data, compensation & benefits in-depth knowledge and pension & employee risk benefits expertise.
Zviran provides data and professional advice for more than 450 employer customers, including Israeli and global, private and public companies from different industries.
Zviran's services include:
§ Salary and benefits surveys
§ Compensation and benefits consulting to employers
§ HR, payroll and relocation consulting
§ Pension and employee risk benefits consulting to employers
§ Pension and financial advice to high net individuals
Zviran has a strategic alliance with Mercer, world's largest HR firm.
About Odelia Pollak and ESOP:
Odelia Pollak is a Co-founders and CEO of ESOP-EXCELLENCE. Odelia has more than 15 years of experience in the field of Stock Based Compensation Plans and has vast experience in managing, consulting and operating diverse incentive plans and their related aspects to private companies as well as public companies. Prior to joining ESOP-EXCELLENCE, Odelia Pollak acted as the manager of the professional aspects of incentive plans in Investec Trust Company (Israel) Ltd. (currently U-Bank). Odelia holds LL.B. in Law and B.A. in Business Administration (in excellence) from the IDC and is a Certified Equity Professional (CEP).
ESOP - EXCELLENCE, a market leader in the trust and administration field, offering a comprehensive approach of the management, operation and supply of solutions to:
Various aspects of Stock Based Incentive Plans to employees, directors and service
Mergers and Acquisition (M&A)
Escrow to Source Code (in affiliation with Iron Mountain)
ESOP – EXCELLENCE is servicing private (from the pre-seed stages) and public trade companies around the world.
