Explaining equity to the team: unpacking Ledgy's most asked question!

I often get asked questions from other founders and managers about how they manage equity in their companies. One question nearly always features: “How can we best explain the value of ESOP to future employees?”

I really appreciate hearing this question, as it shows that the person asking cares about whether or not their team really understands what their share options mean. But if there is no clear path to explaining equity, how are founders and senior executives meant to be confident they are doing the right thing?

A few simple principles can help get companies started here.

Four steps to explain equity to your team

1. Explain the structure behind your equity.

Especially in later stage scaleups, it is now the norm to have a system or a set of benchmarks that define equity allocations in different teams, geographies and levels of seniority. In Ledgy’s case, we allocate equity as a flat percentage of team members’ salaries. Being able to articulate how your company determines employees’ equity stakes is a crucial element that builds trust. Your team should not see equity as something that is decided on a case by case basis.

2. Showcase different scenarios.

For young companies, it is sometimes challenging to make equity seem real and concrete when liquidity might be some way away. Keep team members engaged by helping them visualize the value of their equity stakes adjusted for future scenarios:

• Present valuation (i.e. at the most recent funding round)
• Expected post-money valuation after the next funding round
• The ‘moonshot’ valuation: what will employees’ equity be worth at $1 billion? Or $1 trillion?

3. Explain the mechanics and terminology.

There is no escaping it: equity is not always easy to understand, especially if you are not familiar with financial terminology. Terms like vesting, cliffs and exercise windows might seem intuitive to founders or CFOs, but employees need simple definitions that make these terms make sense. Our guide to explaining employee share plans could help you get started here.

4. Get equity out of inaccessible, error-prone spreadsheets!

Demonstrating different scenarios and making equity come to life for employees sounds great, but it is exponentially more difficult to do this if you have your equity information locked up in Excel sheets. Each team member needs to really own their equity data, and tailor-made software also reduces the risk of human error that can have real consequences down the line. Being transparent and putting equity into everyone’s hands helps to show your team that you take equity seriously.

Our State of Equity report showed that more employees in the tech sector own equity stakes compared to any other industry. This is a great base to build from, but if companies fail to explain equity properly, employees may be less motivated and engaged by the mission.

I hope this helps other founders who are thinking about explaining equity to their teams. Please reach out to me or the Ledgy team if you have any further questions! And to read more articles like this, head to our blog.