What is the most effective way to present equity compensation to candidates?

Equity compensation is not for everyone. Its for individuals with a entrepreneurial mindset who own both upside and downside of a startup. Each organisation needs to have it unique ESOP program that suits its need and aligns with the vision. Individuals not only need to be explained the advantages of the program but also what happens when things go wrong. People also need to know details about type of equity, probability of wealth creation, market data on probable outcomes.

Equity compensation is about having an ownership stake in the collective success of a business. It seeks to make you think and act like an owner. The value proposition has several elements, among them 3 stand out: First, that this is a long-term component of compensation and you should clearly explain upside and downside associated with it (value, vesting, liquidity, etc). Second, how equity compensation is consistent with your objectives, values and culture and the sense of belonging it brings - welcome to the family. This also comes with obligations! Finally, the importance of discretion. It’s generally not a good idea to discuss what you own or how much it is worth. No upside to it. Be a responsible owner.

Stock based incentives within a private equity backed company have real potential to create value for your key team members. Remember, when a company takes on a PE partner they also take on an exit. As we approached our closing, I encouraged and helped team members pre-plan for a windfall of cash and the corresponding tax implications. Hundreds of thousands to millions of dollars were distributed to key folks at exit. Being smart with this money can be life changing. One of the best messages was to encourage these folks to just “stare at cash” for a year. This amount of time is needed to (a) ensure no stupid impulsive purchases are made, (b) get comfortable with this money in the bank, (c) time to think.

Convey value in a clear and compelling manner while aligning it with the candidate's interests and expectations. Don't impose your value system on the candidate's. Seek to understand where they are coming from and their value system. Adopt and mold your proposal into one that aligns and optimizes the candidate's value system. $ isn't everything, look for intangibles. Younger generations value freedom and social impacts, seek to identify those values. Address risks and uncertainties; provide support and even mentoring opportunities, follow up to address concerns. Talk about onboarding program and training support.

It is very important for everybody in the team to understand the value proposition If they don’t understand this, then they don’t know what they are selling and why they are selling Once they understand this, they will understand the value of the equity and their long term growth trajectory

Simple and practical: This is what it’s worth today… This is what it could be worth by the time you can exercise the right to encash it (upside and downside scenario)… This is what most people who receive equity/options do… Let them come back with questions. They will seek and receive a glut of well-meaning, anecdotal and overcomplicated advice from friends.

Simplify your equity compensation package by avoiding jargon and using plain language. Clearly explain ownership, value, and potential liquidity with realistic scenarios tied to the company's performance and future funding.

Simple and clear language is important. So is tailoring the package to eliminate grey areas. If the compensation package needs more than a page to explain how it works, it's too complicated and likely a monster to manage. Conditions need to be kept to a minimum. Also, clear lanes for team members so there is no doubt as to how each team member's effort contributes to the overall success of the compensation program.

Often companies offer # shares or $'s worth of shares. But both these numbers are useless without context. If I told you that you'll be getting just 1 share, in most cases that sound awful but at Berkshire Hathaway that's more than half a million, yes please. For startups, where it's all very high risk, highly uncertain and rather confusion, the best packages set out forecasts: you currently have X. If the company exited at value A, you'd earn Y. The BEST packages will also outline tax implications, e.g. "Since you're on the EMI scheme, these shares will cost you (A) and return you (B)."

Simplify your equity compensation package by avoiding jargon and using plain language. Clearly explain ownership, value, and potential liquidity with realistic scenarios tied to the company's performance and future funding.

Comparing Equity Compensation with Other Options at Jones Software Corp Advantages of Equity Compensation: Alignment of Interests: Potential for Significant Upside: Ownership and Influence: Considerations and Trade-offs: Liquidity and Timing: Risk and Uncertainty: Respect for Other Forms of Compensation: We understand that equity compensation may not be the right fit for everyone. Some candidates may prioritize stability, immediate financial security, or other benefits such as healthcare, retirement plans, or flexible work arrangements. We respect and value these preferences, and we're committed to offering a comprehensive compensation package that meets the diverse needs of our team members. Differentiation from Other Companies:

Analyze and differentiate your equity compensation package by comparing it with alternative options candidates might be considering. Acknowledge that equity isn't a one-size-fits-all solution, recognizing the trade-offs and opportunity costs involved. Be transparent and respectful about other valued forms of compensation, like cash, benefits, or flexibility. Highlight the pros and cons of your equity offer, emphasizing its unique advantages and how it sets your company apart from others in your industry or stage of development. This fosters a comprehensive understanding for candidates, allowing them to weigh their options thoughtfully.

If options are not there, you can also consider to pick a relevant use case for the candidate to be able to portrait and simulate.

Rather than solely comparing equity compensation packages with other options in the market, focus on how your company's culture and values uniquely support and enhance the equity experience. Discuss initiatives or programs that foster a supportive and collaborative environment, emphasizing how these factors contribute to the overall attractiveness and effectiveness of your equity offer.

When talking about equity compensation, it's cool to stack it up against other perks. Show how it offers a slice of the company pie, setting up for bigger wins down the road, unlike just getting a regular paycheck or a yearly bonus. It's like choosing between instant gratification and betting on a future jackpot. This way, candidates can see the real deal about what makes equity stand out – it's about growing together and sharing in the company's success.

Pay attention to their expression and reaction, especially when it comes to cultural different in different countries. In my experience, it is ok to proactively checking on what they think about the offer and get their quick reaction about it

Proactively address candidate questions and concerns about your equity compensation package. Anticipate both common and specific queries, covering topics like the valuation of your equity, exercise/sale processes, tax implications, and the impact of exits or company changes. Offer clear and accurate responses, supplemented with relevant resources and references for additional information. Encourage candidates to seek professional advice if they require further clarification or have doubts. This open and informative approach fosters transparency and helps candidates make well-informed decisions.

Proactively addressing queries by offering personalized consultations can demystify the complexities of equity compensation, ensuring candidates feel supported and informed. Providing access to workshops or financial advisors for deeper dives into equity intricacies can further enhance understanding, fostering a culture of transparency and trust

Most folks ask about the straightforward value of their stock and how they can liquidate it without an overhead cost to them personally. It is very important to answer all their questions transparently so that they can make an informed decision. It is better to give them time to consult other friends, family members or professionals to make a decision. If they need a second or third round of clarification, it is important to patiently address their concerns.

As an employee myself, I know for a fact that I can be particular about my remuneration and compensation package. However, not everyone is like me. Some people have a difficult time saying "No" and would just accept it all but later, this impacts their zeal to work. We then see this as workplace turnover. They leave. As an entrepreneur, I also know for a fact that certain peak hiring times could have us miss indicators that we might be hiring someone who isn't pleased with their compensation package. From these standpoints, I would say, compensation packages should be reviewed every year or bi-annually with employees in tow. Additionally, the HR team should always be ready to receive and answer any questions from employees.

Asking executives what drives them and personally motivates them is vital to a compensation package that has flexibility. The individual priorities will definitely vary from individual to individual. Additionally this is an excellent opportunity to show the executive that you genuinely respect their efforts as an individual , and thus want to compensate them whenever possible in a manner that supports their objectives. This can often create Long Term loyalty in an ever changing competitive business environment !

When customizing equity compensation offers for candidates, it's essential to individualize the proposal based on each candidate's unique goals, preferences, and contributions. Tailoring the offer to align with their role, experience, and potential value demonstrates appreciation and recognition of their individual worth. Additionally, expressing enthusiasm for their potential contribution and showcasing how they align with the company's vision fosters a sense of belonging and value within the team.

Instead of solely customizing offers based on individual preferences and contributions, emphasize the long-term growth opportunities inherent in equity compensation. Discuss how equity ownership aligns with the candidate's career aspirations and long-term financial goals, highlighting the potential for significant wealth accumulation over time. This perspective underscores the enduring value of equity beyond immediate preferences, resonating with candidates seeking substantial professional and financial growth.

Customizing Your Equity Compensation Offer at Jones Software Corp Understanding Candidate Goals and Preferences: Considering Role, Experience, and Contribution: Expressing Appreciation and Enthusiasm: Tailoring the Offer: Open Communication and Collaboration: Demonstrating Alignment with Vision and Values: Finally, we reinforce how our equity offer aligns with our company's vision, mission, and values, emphasizing the opportunity for candidates to be part of something meaningful and impactful. By illustrating the connection between their individual goals and our collective aspirations, we inspire candidates to join us on our journey towards success.

Customizing equity offers shows candidates they’re special to us. By thinking about their long-term goals and offering stability, we let them know we’re invested in their future, not just what they can do for us now. This personal approach makes them feel valued and part of our journey, boosting their commitment and connection to our success. It’s about building a team that grows together.

A somewhat counter intuitive or counter cultural perspective: While everyone has the right to negotiate, I believe negotiation devalues the offer and sets a tone early that you need to ask for more or that the company generally holds back. Make a fair offer. Accept a fair offer. If the offer made isn’t fair, you lose more than the candidate - you lose trust.

True. If one has confidence in the employee’s abilities, incentivizing adequately can be extremely rewarding for the company.

Following Up and Negotiating Your Equity Compensation Offer at Jones Software Corp 1. Clear and Frequent Communication: 2. Openness and Flexibility: 3. Mutual Agreement: 4. Transparency and Honesty: 5. Walking Away if Necessary: 6. Respecting Candidate's Decision: Regardless of the outcome of the negotiation, we respect the candidate's decision and appreciate their time and consideration. We maintain professionalism and gratitude throughout the process, leaving the door open for potential future opportunities to collaborate.

If you're offering stock options, it's likely you're targeting a senior candidate. At this level, negotiations might involve salary or options before final approval, so having some negotiation room defined beforehand is crucial to maintaining momentum. There's no magic phrase in follow-ups to grab a candidate's attention. What matters most is that they're satisfied with the entire package: company, culture, team, salary, and equity. If a candidate doesn't respond to a follow-up, it's not necessarily about the equity; it could be the broader context. If their interest lies in joining but the equity is the issue, they'll let you know, giving you the opportunity to negotiate using your defined margin.

Equity compensation aligns interests, fostering shared success. For employees, it's potential wealth; for employers, committed talent. Presenting equity compensation to candidates is a unique opportunity to attract talent and foster commitment. Here's my advice: Be transparent and educational. Explain what equity compensation is, its potential value, and how it aligns their success with the company's. Show them it's not just a job, but a partnership. Use real examples to illustrate potential growth. Remember, it's not just about sharing profits, but sharing a vision. Make them feel they're investing in a shared future, not just working for a paycheck. This approach can turn candidates into dedicated partners in your entrepreneurial journey.

Unless you are a late stage startup, equity is worthless. Make sure to pay your employees as best as you can, for they are true believers. Only then will equity matter.

One additional aspect that I'd like to highlight is the importance of ongoing education and support for employees who participate in our equity compensation program. At Jones Software Corp, we understand that equity compensation can sometimes feel complex or unfamiliar to individuals who may not have prior experience with it. Therefore, we're committed to providing resources, training, and support to help employees fully understand and maximize the benefits of their equity ownership.

In my experience you can’t really quantify the value of equity until later stages, so how you communicate / explain it changes over time. In the early days, everyone wants to know what % they are receiving, and how you think about fundraising / dilution over time. They know it’s almost impossible to peg a real value at this stage. So they want to know: -Percentage they’re awarded -At what strike price (409A valuation) As a company matures and generates real revenue where you can start to back into a valuation, then you can start thinking about equity more in terms of dollars. Ex. 1,200 shares = $X of equity comp per year.

Don’t make this mistake! Too often I see too much is given away too soon - and to the wrong people! Be careful - specifically in the early stages. Look at the total journey, and what roles the company will need in the future. A really good idea in many cases is to let the equity be earned in stages. If certain metrics is obtained, or if a certain time period has passed, the equity is given away step by step. Let the proof be in the pudding. There are a number of ways to construct this, but clarity is crucial. Good luck!