An Expert’s Guide to Equity Incentives
In the startup world, attracting and retaining top talent is critical to success. A big part of this is offering the right kinds of incentives.
And when it comes to incentives, there are more choices now than ever before.
In addition to standard salary remuneration, more companies are turning to equity incentives to recognize the contributions employees make to their success.
When it comes to using equity incentives to attract talent, however, there can be a lot of detail to wade through. Virtual stock programmes, capitalization tables, tax implications - it’s enough to make your head spin!
That’s why we gathered our finance community for an illuminating discussion on the ins and outs of equity incentives at our CFO Connect meetup in Berlin on May 21.
About our experts
We were joined by a panel of four equity incentive experts with experience in a range of industries and markets.
Aiga Senftleben, Co-Founder, Billie: Aiga is Co-Founder and General Counsel at Billie, a factoring and capital management firm for SMEs. Previously, Aiga held positions as General Counsel for Funding Circle and Legal Counsel for PayPal.
Mazin Biviji, Co-Founder, Toquity: Mazin is Co-Founder at Toquity, an equity management platform for founders, employees, and investors. Mazin has experience working in consulting for Deloitte, as well as Pfizer.
Filip Dames, Founding Partner, Cherry Ventures: Filip is a Founding Partner of Cherry Ventures, a Berlin-based Venture Capital fund. Prior to Cherry Ventures, Filip led business development for Zalando.
Florent Artaud, CEO, Ekwity: Florent is Co-Founder and CEO of Ekwity, a firm dedicated to advising startups and founders on their equity sharing options. Previously, Florent worked at La Ruche qui dit Oui! and BNR Avocats.
Why should companies offer equity incentives to incoming employees?
“Using equity incentives like company shares or ownership is about creating value for employees, and growing the value of the company at the same time,” says Florent.
“If you’re a young company, you might not be able to offer the same kinds of salaries as the bigger players like BMW, Google, or Alibaba. Instead, you attract people with a great mission, and good equity options.”
According to Florent, there are a range of benefits to having employees own part of the company via equity incentives. “It’s about effective recruitment and talent engagement, but it’s also about aligning the goals of the employee with the goals of the company.”
Unfortunately, there’s still a lot of progress to be made with promoting equity incentives in some parts of the world. “In Europe, especially in places like France, equity incentives are a new thing, and people aren’t super familiar with the concept. We’re here to help spread awareness.”
Salary vs. equity - which is better?
When it comes to incentivizing great performance, says Florent, there are benefits to offering equity in addition to salary.
“Salary is dependable and short-term, but capital is long-term and variable. With equity, you can promote alignment between employees and owners, and create a stronger incentive for loyalty and commitment.”
Aiga agrees. “You can attract people with a great idea, and with the possibility for them to do what they want in their work. Then, by offering equity, you can also help them to become part of the company. This is a great way to attract the best people.”
So, offering equity can be an excellent way to bring the best talent to your growing company. But how does it work in different parts of the world?
Equity incentives around the world
When it comes to the awareness of - and attitudes towards - equity incentives, things can depend a lot on where in the world you happen to be.
“In the United States, you expect to get equity when you join a startup,” says Mazin. “In France or Germany, the same expectation isn’t there. It seems like equity is something not everybody understands all that well.”
Filip has noticed the same thing. “Stock options are a lot more common in the United States. Over there, if you become a meaningful part of the business, the thinking is that you should become a stockholder, too. It’s a way to build a closer connection.”
Part of the reason equity incentives haven’t taken off in places like Germany? Taxes.
Taxes, taxes, taxes!
“In Germany,” says Filip, “we have a few problems around the taxation of stock. There’s a 40-45% taxation on profits from shares, but with equity it’s more complex. You might have to pay tax on the company’s present value, even though you haven’t made money yet.”
What makes this situation even trickier is how the approaches can differ between countries. “In France,” says Florent, “you pay tax only where there is liquidity. So, if you hold shares but haven’t realized any liquidity yet, it’s a different situation.”
One great solution a lot of companies are using to address these taxation implications is virtual shares. Of course, our panel had plenty to say on this subject too!
Virtual shares - what’s the deal?
Because of the sometimes onerous conditions associated with owning stock in a company, many startups offer ‘virtual shares’ - a simulation of company shareholding with no actual shares. This flexible approach to offering equity incentives has proven popular in many places.
“Most companies in Germany choose VSOPs (virtual stock option plans),” says Filip. “This way, people aren’t involved in the capitalization table, and it’s more convenient.”
Aiga is on the same page. “If you want everyone to participate, VSOPs are a better choice. Sometimes, people just hear about the tax side of things, and are put off by the implications of it. That’s why they prefer salary. VSOPs offer a simpler way to manage equity.”
A (very) short primer on cap tables
Capitalization tables, or simply ‘cap tables’, are an indispensable tool for managing company equity incentives. But what are they, exactly?
“In its simplest form,” explained Mazin, “a cap table displays the employees, founders, and investors, and gives analysis around their percentage ownership and equity value.”
However, says Mazin, things can get a little more complex. “In its fullest form, a cap table includes the nuances of the share purchase agreement, things like vesting schedules and terms, liquidation waterfalls, and so on. This is the full view of what the company is worth.”
Conclusion: make sure you're up to speed with equity incentives
Given how tough it is to find great people these days, startups need to use all the tools available to attract the right talent. This includes equity incentives.
And when it comes to the question of how to offer these incentives, plus what to expect over time, it’s best to listen to those who have been through it all before. That’s why we were so excited to hear what our experts Aiga, Mazin, Filip, and Florent had to say.
Of course, we don’t have time to cover off all the useful points discussed at our CFO Connect meetup in Berlin. Instead, we’re planning to take a deeper dive into equity incentives in a future post. Stay tuned for further updates.
And while you’re here, be sure to check out our list of upcoming CFO Connect events. We’re always looking for ways to break down complex topics for our finance community, and we’d love to meet you in person!