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Seven reasons to provide equity for early employees in early-stage startups

Startups in Europe have seen a record-breaking year for growth and funding with more focus on equity than ever before. However, the European ecosystem still trails its US counterpart when it comes to understanding and explaining the value of equity. 

Why? This is down to a lack of educational resources for both founders and employees. 

To tackle this barrier, here’s a rundown of the top seven reasons why you should provide equity to employees working in your early-stage startup.

1. Attract top talent

At the start of your journey, attracting top-tier talent to see you through those early years is one of the biggest challenges. Without having the resources to offer staff competitive salaries in line with market rates, how can you win the war for talent? 

Equity is the answer.

It’s a weapon in every startup’s armoury to attract, incentivise and retain talent. Income takes a short-term hit in exchange for a significant equity payout, should the company succeed.

If an employee is willing to make this compromise, it’s almost a guarantee they’re in it for the long haul. In fact, when Capdesk surveyed employees on the matter, 80% of employees reported that they would rather work for a business that offers an employee share scheme than one that doesn't.

2. Motivate your team

Employee rewards – including equity – are impacted by the performance of the startup. The higher the valuation of the company, the more employees can expect to earn from their equity. 

More employees are realising that equity can lead to a large financial reward down the road. A record number of unicorn valuations across Europe in 2021 and 42 IPOs from companies that collectively raised $8.5 billion has catalysed an employee awakening – as figures rise to match US standards.

Employees have a personal investment in the startup’s success through their equity and are more willing to go the extra distance. 79% of employees surveyed about employee equity said that they would be more committed to, and work harder for, a company that offers an employee share scheme.

3. Create company culture

Startups often focus on the role company culture has to play in creating a strong team and facilitating future success. An employee equity scheme is fundamental to establishing a company culture in which staff feel valued, fairly compensated and invested in a business’ journey. 

Owning a share of a startup encourages a sense of responsibility towards the company and creates a direct connection between employee performance and startup success. It gives an employee a ‘founder feeling’ – a chance to see the business from the founder's perspective. They have a long-term role to play and their hard work will benefit both them and the company.

Capdesk Co-Founder and CEO Christian Gabriel explained during a webinar on changing attitudes to equity that “it’s a vital tool in building a team of people who care about their work. Those with equity in a business have more purpose in what they’re doing, and that benefits all stakeholders.”

4. Compensate for the risk

Startups aren’t guaranteed to succeed – in fact, only the top 10% survive – meaning employees who accept startup jobs take on significant risk. Surely they deserve to be compensated for it? Equity is the perfect solution. 

Startup failure isn’t the only risk that needs mitigating. Employees of early-stage companies work above and beyond to keep the business growing which makes striking the right work-life balance difficult. There’s also no guarantee of the steady career progression that’s often found in larger corporations.

Therefore, employee equity is both an incentive and a reward. It gives staff a reason to go the extra mile while simultaneously recognising the risk they’re taking in doing so.

5. Work towards the same goal

What matters to your investors won’t always translate into your employees’ top priorities. However, equity is one way to align diverse business interests around a shared goal – the company’s success. 

Everyone is invested in achieving the best outcome and will be rewarded should they succeed. With everyone pulling in the same direction, you cultivate an environment of togetherness and create a more unified team. 

YuLife sets a great example here, as told to Capdesk in a webinar with Sam Fromson, COO and Co-Founder of the insurtech company: 

“Having a stake in the business is part of what drives that sense of responsibility for a shared culture. When we say we’re on a journey building this business together, changing this industry together, it’s not just something that we pay lip service to.”

6. Stabilise the future

Employee equity helps to retain talent as well as attract it. This is important when looking for stable, long-term growth for your business. 

Commonly, companies opt for a four-year vesting schedule for employee equity awards. This encourages employees to commit to a business for that duration and acts as consistent motivation throughout. One desired outcome is that employees are more reluctant to leave at the first offer of a higher wage, especially if there’s a promise of a long-term financial reward should they stay where they are. 

In a turbulent startup environment, stability is key. World-class talent builds your company which means you want to avoid high levels of employee churn. With vacancies at an all-time high, it’s already an expensive and time-consuming battle to find top-quality hires. Better to hang onto them and give yourself more time to focus on growing your business.

7. Relieve cash flow pressure 

Startups are typically cash-strapped with management teams frequently concerned about cash flow. Survival instincts kick in to preserve and protect your company’s runway. 

Equity, however, is a mechanism that allows you to offer alternative compensation to your employees: part-salary, part-equity. Not only does this take pressure off your cash flow when recruiting top-tier early-stage hires, but you can align employees with the company’s future vision. It’s a win-win.

That finishes up our seven-point guide to awarding equity to early employees in early-stage startups. If you would like to find out more about how employee equity and effective cap table management benefits your business, take a look at the Capdesk resource library or get in touch with the Capdesk team.

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