Explaining Equity

Earlier we explained how providing equity compensation can be a great way to incentivize and reward potential and existing employees, especially for startups. But understanding the value and purpose of equity can be really difficult and often intimidating to candidates and the managers tasked with explaining equity to them. It’s worth dedicating special attention to equity when communicating an offer.

Make sure the candidate is sold on the future of your business. If you’re an early-stage startup, it is not possible to know how much a share of the company will be worth or how long it will take for ownership to become valuable. The candidate needs to believe in the future of the company for an equity package to be enticing; hopefully, they believe the company will be more likely to succeed when they join the team. And hopefully, you have been working on this throughout the process, but if the candidate still has concerns at this stage, you, your team, or even your investors can help make sure they believe in your company.

Next, help them understand the basics of equity compensation. You can refer to the Holloway Guide to Equity Compensation as needed.

Work through what the equity you are offering could be worth in different scenarios. One technique we’ve found that works well is to have a spreadsheet that you can use with candidates to play these scenarios. How is the value of their equity determined now? How many shares are they getting, and how many shares are outstanding? What is the vesting schedule and, in the case of stock options, what is the exercise price and window? How much might all the equity be worth if the company ends up going public or getting acquired at different valuations? This can help them understand, concretely, what the equity you are offering could be worth.

Equity calculators like Front and Salary or Equity can be used to help walk a candidate through the equity portion of their offer.

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