10 ways equity engages your team

The phrase “take ownership” has two meanings: to possess something, and to be responsible for something. That’s the power of employee equity in a nutshell.

When you give people the opportunity to earn a piece of their company, you change how they see their jobs. They stop treating the work they do every day as simply the thing that gets them a paycheck. They start to understand their work as an investment that can have real long-term upside.

Done fairly and transparently, equity can be a force that helps the entire company balance short-term ambitions with long term purpose.

And sharing ownership has any number of other impacts on companies, both big and small. Here are 10 ways equity positively impacts teams in growing companies.

1) Employee equity builds internal transparency

Giving equity to the team can help employees feel invested in their work and motivated to help their company succeed. However, that’s only true if people understand what their ownership stakes mean – which is a great opportunity for leaders to build trust and enhance transparency internally.

In theory, companies with employee equity schemes should be more transparent, particularly when it comes to sensitive topics like the value of the company and investment rounds. Companies that don’t make this effort risk frustrating employees and creating unhelpful information asymmetries in the organization.

2) Equity lets employees benefit from high-risk startup roles

Startup jobs can be more demanding and less stable than those at established companies. They often come with long hours, rapidly shifting expectations, and increased jeopardy – after all, startups often have shorter runways than more mature companies.

Additionally, many startups can’t afford to pay employees salaries that compete with more established companies. In this context, equity gives cash-strapped startups a lever to reward their employees for the hard work they put into building an early-stage venture.

“People are putting not just their knowledge into this company, they’re putting a certain degree of their lifetime in too,” says Martin Schleich, Chief of Staff at European aerospace scale-up Isar Aerospace, in conversation with Ledgy CEO Yoko Spirig. He says that given the risks and sacrifices startup employees take to make the company a success, a salary is not enough: companies should reward them with an ownership stake. “It's not just a question of compensation it’s also a question of recognition,” Schleich adds. “If you hand people equity in your company, they feel valued in the way they should feel valued as a key contributor.”

3) Employees with equity feel and act on a sense of ownership

Employees with an ownership stake think about their jobs differently than employees who don’t have shares or share options. Employees with equity can see a direct correlation between the work they put into the company’s value, and the financial reward they could receive when the value of their equity stake increases. They take an interest in big-picture strategy rather than focusing solely on their own roles. And they’re more prepared to challenge plans they disagree with, introducing an extra perspective leaders can use as a sense-check.

By rewarding employees with shares, you also invite them to share the responsibility that comes with having a financial stake in a company.

4) Equity schemes attract entrepreneurial types who often thrive at startups

Not everyone is suited to the ups and downs inherent to startups. Many people prefer the security of more established companies. By contrast, people who are drawn to startups tend to be entrepreneurial.

Employee equity schemes harness that entrepreneurial spirit by allowing employees to potentially turn their early investment into real financial rewards. We often think about this journey in the context of startup founders, but with an equity scheme, the phenomenon becomes true for employees too.

5) More candidates expect equity today

Yes, fair and transparent employee equity schemes can help you stand out to top talent. But failing to invest in employee equity can leave your company trailing behind when you’re trying to hire.

The perception of employee equity has transformed from a bonus to be an expected part of a compensation package. Although this has been the case for some time in the US, it is only in recent years that this transformation has started to take place in Europe. Companies that want to attract top talent need to offer competitive equity packages. If it’s missing from your offer, people will notice, and hiring A-players will only get harder.

6) Equity incentivises employees to stay long term

Once you have a great team, you want to keep them around. Your equity scheme is a critical incentive to motivate your employees to commit to your company for the long term.

The standard vesting period for employee share options is four years with a one-year cliff, meaning that in order to claim 100% of their options, an employee has to stay for at least four years. Studies have found that on average, millennials stay in a job for somewhere between two and three years, meaning that implementing a standard vesting plan could help improve retention.

Are you a startup share option holder? Think of your vesting terms less as a stick and more as a carrot. Companies shouldn’t manipulate their employee equity schemes so that employees feel that they have to stay in jobs just for the equity. That’s why it’s a bad idea to enforce harsh bad leaver clauses. But a fair and transparent equity scheme can be one factor that shifts the balance in your favour when a team member is weighing up their current role versus a new option.

7) Good investors value employee equity schemes because they know the importance of top talent

There’s a misconception that most investors dislike employee equity schemes. The myth says that these schemes dilute the value of investors’ shares and give away shares at a lower price than investors pay.

However, experienced investors understand that employee equity schemes ultimately increase the value of their stake. In fact, some investors only invest in companies with employee equity schemes or make it a condition of their investment. They know that employee equity schemes attract the top talent needed to help the company achieve its business and financial goals.

Although the percentage of the company the investors own decreases as more is awarded to employees, the company is worth more overall. They effectively receive a smaller piece of a bigger pie instead of a large piece of a small pie. When employees are motivated through equity, everyone benefits.

8) Equity can be a valuable tool in a tough economy

A rocky economy can make employees nervous, especially in startups, which might be less financially stable than more established businesses. Some companies choose to double down on equity plans in difficult financial times as a way of acknowledging employees who continue to support them.

When people feel a sense of ownership in a company, they’re more motivated to double down when the going gets tough rather than throwing in the towel. And awarding equity in a downturn can inspire employees to focus on the future.

9) Employee equity schemes are a tangible way to meet DEI goals and expand access to investments

A lot of companies want to actively promote diversity, equity, and inclusion (DEI) but struggle to find clearly defined strategies that make a tangible difference. As the name suggests, an employee equity scheme that is done well can be a very real way to improve equity across a company. “Startups offer something that has become very rare in our society, which is upward social mobility,” says Schleich. “Equity ownership programs in startups can change that to a certain degree.”

It’s also been shown that equity has its own DEI issues. For instance, female founders get their equity diluted more quickly than male founders. Flexible equity policies that give employees more autonomy to make their own financial decisions are helping to resolve some of the inequalities we still see in the tech sector. For instance, more companies, including Ledgy, let employees trade salary for equity, giving them more say in how they’re compensated.

Starting an employee equity scheme isn’t going to change the whole world. But it’s a tangible step companies can take to make their little corner fairer.

10) Equity empowers employees to contribute to the startup ecosystem

Startups have become a key part of local and global economies. In 2020 it was reported that startups globally generate more than $3 trillion in value. Employees who benefit from their company’s equity schemes can put some of that experience (and potentially their cash) back into future startups.

“It’s an ecosystem play,” Schleich says. “People who worked in a startup and earned a certain amount of money there are more likely to start a company themselves or become investors and then bring it back to the ecosystem. So in my opinion, equity is a very good way to boost this ecosystem and to pay something back to it.”

Summing up: employee equity is a responsibility and a reward

By now we know that people don’t come to startups for pool tables and free beer. Many startup employees are motivated by the opportunity to contribute to an exciting new idea. Equity schemes reward and harness that spirit by giving employees a stake in the company that goes beyond their day jobs.

Equity gives people an extra reason to choose you over another company; to do their best work, innovate, and focus on long-term rewards, even in a tough economic cycle. Equity schemes also demonstrate to employees that their value and hard work is recognized. Giving away ownership means more people taking ownership, and that’s how great companies are built.

Explore Ledgy’s employee dashboard and unleash the power of equity for your team today.