The biggest questions about employee equity answered by Raisin, Index Ventures and Ledgy

Dominic (VP Talent at Index Ventures,) Frank (CFO at Raisin) and Yoko (CEO at Ledgy) share their experiences with employee equity and what it means to share ownership with employees.

1. What attitude should the founders have towards employee equity?

Frank, CFO at Raisin encapsulated the attitude very nicely with the following thought.

“Employee equity requires shared insights and being transparent on valuation, and sharing numbers with the team. If leaders are not willing to be an open book to their employees, I wouldn't even start thinking about equity.”

2. If employees aren’t really asking for equity, what’s the point of diluting the rest of us?

There are two very practical aspects of why giving equity to employees is crucial.

Per Dominic, VP Talent at Index Ventures, the best argument for giving equity to employees is talent retention. “In the beginning, you may be below the radar and you can still get away in much of Europe without offering a stock option program. But by the time you're the size of a Raisin or a Spendesk, you’ve got a great talent pool and your people are going to be called up constantly with job offers–even from big-tech companies.”

“If you haven't created a reason for them to stay–because you can guarantee that Google or a bank could offer twice the salary–if you haven't created a moat to retain those people, you will lose them.”

The second argument comes to light when you're scaling the company abroad, specifically to the United States.

The US market is different, they know about and expect to receive options, which means that you will have to give them equity to even match other job offers. This results in a big divide between the teams in the US and Europe.

Imagine the word getting out to the European team–that has been with your company for a lot longer–that their coworkers from abroad are compensated very differently. That will create resentment and frustration.

You're using your most valuable asset, equity, and yet it's creating negative goodwill not positive.

Frank’s point of view is clear: “I would just say take the pain and do it. Because there are so many reasons and arguments to not do it, but nothing which can be an equally good incentive for companies that reached scale, than granting ownership.”

2. How can I convince investors to let us set aside shares for employee participation plans?

In Frank's opinion, it's about the sophistication of the investor. When you're going through a financing round and someone is against setting aside 2.5% or 3%, they are essentially saying:

“I believe that 3% dilution of my stake is not caught up for by the talent you will hire over the years to come. If you don't believe the talent that we are hiring or retaining over the next years in the organization, will at least yield a 3% return, then you shouldn't invest in us in the first place.”

3. Should the company grant additional equity to employees that already have fully vested options?

Frank's advice is to keep employees excited to stay by granting them equity at all stages.

"Make sure your top talent is never fully vested and even think about re-incentivizing them once they're vested."

"You need to keep them excited to keep them on board because there is always someone else who is willing to pay a higher salary for that person. Especially once you become a brand name in the space."

4. Should employees that leave, still receive their vested shares?

The Good Leaver/Bad Leaver clause typically describes what happens in a situation when an employee leaves. In the harshest of clauses, as soon as someone is labeled a bad leaver, they get nothing, not even the vested part.

Dominic, Frank, and Yoko are all of the opinion that employees should be rewarded with equity and be able to keep the vested part even after they leave.

Per Dominic: ”Very few of your early employees are going to be there all the way through to a big exit. But those people were a really key part of your journey. They’re critical to your success, so treat them generously. And then if they're able to exercise, they become shareholders, they become advocates outside the organization. They become valuable alumni.”

At Raisin, everyone is entitled to keep the options that have vested, furthermore if a secondary room opens, they are equally entitled to sell.

“They deserve them, they earned them, they built Raisin alongside us. Also, it builds proof of value for junior share classes.”

5. Should the employees be able to sell their shares at any point in time?

In Frank's opinion, it's a definite yes.

"Yes, it's a part of their salary. If they feel passionate about selling them, then let them sell. As soon as you offer them to sell, they will realize that someone wants their shares and they're really worth something. And in their head, if someone very institutionally savvy wants their shares, that triggers them to not want to give away the shares at that price."

Dominic would also encourage employee secondaries.

”If you have an opportunity to do some employee secondaries, say you have extra interest from investors–you can do some secondaries. Perhaps this is a series B or C, for employees it turns what is intangible into some real money and it gets people excited. That also magnifies the options that you’ve granted, because it makes them real. And anything you can do to demonstrate that, is hugely positive.”

6. What needs to be done before introducing employee equity plans?

To show the benefits of equity, you have to educate yourself and your team.

It all starts with the founders. Once the founders are aligned and educated, it’s time to present the topic of equity to all employees. There are a multitude of greatly effective and yet simple ways of explaining equity plans.

The following is what we did at Ledgy and it proved to be very successful:

  1. Create a short presentation of the different stages a company goes through (Seed, Series A…) and the equity distribution among founders, investors, and employees at each stage. Then point out which stage your company currently is at. This will help employees grasp the context and benchmark their position later on.
  2. Explain the chosen equity plan. Most often misunderstood parts are the vesting schedule and what happens once the employee leaves. Here’s what we use for ESOP/PSOP. Feel free to use it as a blueprint or even use it as is.
  3. Announce an AMA (Ask me anything) where employees can ask you clarifying questions. Most importantly, give the employees a few days in between the 2nd and 3rd point, so they can research on their own and come back to you with relevant questions.

At Raisin, they also have ESOP training and then a yearly ESOP letter, which talks about what happened in the last year related to valuation and stock options.

7. How to deal with distributed teams when it comes to equity programs?

Since Raisin awards stock options, Frank offered some advice on tackling ESOPs in Germany.

The grant is a non-taxable event, but later, at the point of exercise, tax authorities join the conversation. The delta between the strike price and the fair market value is taxed as employment income.

Frank wouldn’t encourage the employees to exercise as soon as their options vest for a couple of reasons:

“The exercising of options creates dry income which is taxed at the highest possible mark–as employment income–and is also subject to security contributions. Furthermore, as a scale-up company, there is a risk of valuation downturn or even a possibility of no liquidity event and in that case, there is no callback of the tax that’s already been paid.”

When it comes to international teams, there are different ways of approaching employee equity and the first difference comes from whether there is a separate incorporation in that country or not.

Raisin has a separate incorporation in the US and their US team, for example, receives RSUs. RSUs are similar to options in Germany and are also taxed at the time of exit/exercise.

Usually, it’s not any more complicated to administer equity plans for international teams. In Frank's experience, however, one exception stands out. When it comes to granting equity in France, if it’s not a structured program like BSPCE, both the German and French authorities tax the gains, not as capital gains, but as employment income which is higher.

An additional useful resource for taxation of stock options in different countries.

The whole webinar was recorded and you can watch it here

21 Jul 2020
Spela Prijon
Business Development & Sailor

Onboard new employees in seconds