How do start-ups do equity incentives and options?

Readers who have dealt with the share allocation of equity incentives may know that if the share allocation of equity incentives is calculated according to the head count, the process may be chaotic.

When the company carries out employee equity incentives, it divides employee equity incentives based on positions. There is a simple reason. If the share of employee's equity incentive is distributed directly by employees, rather than by company positions, with the flow of employees, the company will soon find that the implementation and management of employee's equity plan will become more and more complicated, and the subsequent distribution of equity incentive will become more and more difficult, especially when the number of incentive objects reaches dozens. Position-oriented employee equity share allocation is not the case. The employee's resignation will not affect the stability of the position, and the share of the employee's equity that has not been obtained can be left to the successor or replace the employee. If the size of the company reaches 20-50 people, a more effective way to allocate the equity share is to take the department as the unit and then further allocate it according to the positions under the department. This is not only conducive to the overall planning and arrangement of equity incentive distribution, but also simplifies the impact of employee mobility on the implementation of employee equity plan.

2. Incentives for loyal employees

Most start-ups attach importance to recruiting excellent new employees through equity incentives, but may ignore the institutionalized incentives for old employees, that is, encouraging employees who are loyal to the company to serve the company for a long time. If founders want employees to serve the company with the spirit of "being masters of their own affairs", they should link equity incentives with employees' continuous contribution to the company in economic interests. According to statistics, the average continuous service time of technical staff in a company is about 3 years. If the company waits until the first job-hopping peak, it may be too late to implement the second batch of one-time equity incentives. What needs to be emphasized is that the incentive for the continuous service of old employees should be institutionalized and standardized, so that employees can have reasonable expectations, not just based on the mood of the founder. This not only reduces the economic impulse of employees to resign from the system, but also solidifies the continuous service of employees and the development and growth of the company. Finally, it is best to link loyalty incentive with the market level of incentive equity in the same position in real time to achieve the best effect of retaining loyal employees. At the same time, we also understand that this kind of incentive may be complicated to implement, but at the beginning, enterprises need to seriously consider whether to adopt it from a long-term perspective when they develop to a certain stage, especially after obtaining financing.

3. What level of employee equity incentive is appropriate?

We often meet the founders of startup companies or the management of companies responsible for implementing equity incentives to ask, what proportion of incentive equity is more appropriate? We usually advise companies to do their homework and investigate the level of equity incentives for peers, especially potential competitors, because the core purpose of implementing equity incentives for start-ups is to recruit and retain outstanding talents.

4. Equity incentives cannot replace wages and bonuses.

In addition, startups, especially early-stage startups, need to pay attention to that equity incentives are not a substitute for wages and bonuses! On the one hand, it is difficult for startups to implement large-scale equity incentives early, because the value of the company has not been recognized by the market, and the incentive equity of the company is only a blank bill for employees; On the other hand, companies can't ask employees to receive low wages or symbolic rewards like founders or partners, and employees often don't have the risk tolerance and willingness like partners. Otherwise, it will be more difficult for start-ups to compete with other business friends or industry giants for outstanding talents. More importantly, stock option incentive involves the company's shareholding structure, and unreasonable stock option incentive practices will affect the stability of the company's shareholding structure and have a great impact on the company's subsequent financing.

A well-designed and properly implemented equity incentive system can achieve a win-win situation for both companies and employees. Even if the startup company is unable to pay the expensive lawyer's fees, it should use the standardized stock option documents that have been verified by the market to prevent the common risks and hidden dangers in the implementation of stock option incentives as much as possible.