More Expert Advice on Equity Incentives
Equity incentives are one of the most exciting developments going on in the startup world right now. For any growing business, it’s important to understand what they are, and how you can put them to use in driving and rewarding employee performance.
As we found in our last CFO Connect Meetup in Berlin in May, there’s a lot of detail businesses need to work through before they can get equity incentives up and running.
In fact, there are so many interesting aspects of equity incentives to discuss, we decided that one meetup wasn’t enough!
That’s why we’ve continued our equity incentive tour, inviting another fantastic lineup of experts to share their experiences and run through their top tips in London on June 4.
At this meetup, we were joined by a panel of experts: Dominic Jacquesson, VP Talent at Index Ventures, Christian Gabriel, Co-Founder and CEO of Capdesk, and Ian Shaw, Head of UK Employee Share Schemes & Incentives at Orrick, Herrington & Sutcliffe LLP.
We were also moderated once again by the excellent Florent Artaud, CEO of Ekwity.
About our experts
- Dominic Jacquesson, VP Talent, Index Ventures: Dominic is a leading expert on the topic of equity incentives. With over a decade at venture capital firm Index Ventures, Dominic has a wealth of experience helping growing companies to scale and mature.
- Christian Gabriel, Co-Founder & CEO, Capdesk: Christian is Co-Founder and CEO of equity management platform Capdesk, and has a proven record helping medical startups to reach their full potential.
- Ian Shaw, Head of UK Employee Share Schemes & Incentives at Orrick, Herrington & Sutcliffe LLP: Ian advises public and private companies on the design, implementation and operation of share-based employee incentive plans, and has a depth of technical expertise to bring to the table.
- 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.
1. So, what makes equity incentives so great?
Equity incentives provide startup employees with a real stake in the company, building closer working relationships and creating a shared strategic vision. For our experts, this is just one of the many excellent reasons to offer them.
“It’s about attracting talent,” says Dominic. “But it’s also about sharing the upside if the journey goes well. That’s the flywheel of success in Silicon Valley. We’re trying to develop that ecosystem in Europe, and getting entrepreneurs and potential employees excited.”
According to Florent, equity incentives can give emerging companies a real competitive edge. “When you have an unproven business, you can only offer smaller salaries. By offering capital to potential employees, you can compete with the bigger players for the best talent.”
Dominic agrees. “When you start, you’re cash poor. You cannot compete in the market, especially for the top technical talent. If you’re trying to attract and retain critical individuals, you have to look at your secret weapons - like equity incentives.”
For Ian, these incentives are also about building solidarity. “There’s a horrible phrase, ‘corporate glue’, but it really works here. A survey of 4,000 employees showed that share plans consistently led to greater employee satisfaction and motivation. It really does work.”
Christian had a helpful analogy to offer. “Share options are like a love child between communism and capitalism. You’re democratizing wealth, but at the same time you’re encouraging people to work hard.”
For equity incentives to work, however, there are a bunch of details to sort out first.
2. Getting a handle on the key details
In contrast to offering salary or wages, offering shares or share options creates a stronger driver to contribute to company performance. But before offering equity, says Florent, companies need to nail down a key detail: their value.
“The first thing you have to think about is: how should you value the company? There’s the fair market monetary value of the company, but it’s private, not public. There’s no fixed share price for private companies. So, you have to find a fair way to measure that.”
Another key detail to keep in mind? The conditions attaching to equity incentives.
“There’s no public market to allow employees to sell their shares,” says Florent. “That’s something people need to keep in mind. You also have conditions attaching to the shares, like vesting periods before employees can access shares.”
For both company executives and employees, it’s crucial to have a good grasp of these basics - and to communicate the details clearly and consistently.
3. Clear communication is crucial
For Christian, there’s one factor that can make all the difference with equity incentives: communication around cash value.
“There are a lot of hoaxes going around when I see companies explaining these incentives to employees. When VCs come in, you have different share classes. That means your right to cash is not predictable - it depends on what happens with an exit.”
“We discourage companies from describing these options in a way that focuses too much on current value,” says Christian. “It’s tricky, but you have to educate your employees around your exit goals, and explain why you’re taking on investments with particular classes of shares.”
One useful way to provide clear information? Use a captable.
4. Captables: What’s the deal?
Capitalization tables, or captables, are a useful way to summarize the total investments in a company, including the number of shares or share options allocated to each investor, and the key analysis around each investor’s equity value.
“Captables can be really simple,” says Ian. “Essentially, they show you who owns shares, and how many shares they own. You can show what happens with your option pools for each funding series, and what it means for people.”
Christian thinks there’s huge potential to simplify captables for startups. “Share classes can have different entitlements, and these make it a challenge for people to calculate the value of particular equities. This is what we’re trying to do at Capdesk. We’ve made a system that tracks that, because once people really understand the equities, there’s so much more they can do.”
Dominic also sees a lot of value in celebrating those who benefit from share options. “When people see cash events, and see how these impact those who have equity incentives, it becomes very real. It’s no longer funny money. This can be a really positive force in business.”
5. Equity incentives in the UK and Europe
When it comes to equity incentives, it’s crucial to know how the law works in each country. Unfortunately, not every country has the same approach.
“In the UK,” says Florent, “you have a really good legal framework for these kinds of instruments. France isn’t too bad either.”
The hardest place to offer employees shares or share options? Germany.
“Germany is terrible,” says Florent. “There, it’s very difficult to manage equity incentives. There’s a lot of work to do.”
Given these differences in legal and tax treatment across each country, it pays to take advice from the experts!
Conclusion: Make equity incentives work for you
In today’s business environment, startups need all the help they can get to incentivize greater performance from their teams. Equity incentives like shares or share options can be excellent tools to do this.
When it comes to offering the right kind of incentives, every business is different. What works well for some businesses won’t work for others, and you need a way to cut through the detail and understand what’s best for you.
So, reflect on these great pointers from Dominic, Christian, Ian, and Florent, and think about whether equity incentives could be right for your business.
And while we’ve got you here, why not take a look at our list of upcoming CFO Connect events. We’re currently cooking up even more fascinating expert discussions, so don’t miss out!