How to negotiate equity as part of your compensation

Last updated: 16 April 2024

Employee shares and options are an underrated employee benefit. Having a slice of the pie can be financially advantageous for everybody. Think of it as a tasty side dish to complement your salary. 

What’s in it for me? 

According to one study, employees with a lower salary but access to share schemes are a whopping £10k better off than those without.

Think of it this way - if the company takes off, your shares could one day be worth a small fortune. Or more if you hit the unicorn jackpot, like employees at Klarna.

As wonderful as that would be, there are no guarantees that the company’s share value will increase (it could go the other way).

Having shares also doesn’t solve today’s financial challenges, but if things do go well, it could be a nice little nest egg for the future.

What’s in it for the company?

A company can offset market salary with equity. It's pretty common in the cash-strapped startup world. But not startups exclusively.

More established companies are now thinking of doing the same to preserve cash flow. In fact, between 2010 and 2020, the number of UK companies operating a tax-advantaged share scheme almost doubled.

Money aside, employees who are shareholders are more likely to contribute their very best. And if the whole team are shareholders, just imagine what that does to team morale and their collaborative efforts.

Share schemes are shown to increase alignment and productivity and ultimately help the company grow. 

When should I ask?

If it’s not already on the table, there’s no harm in asking!

It's a good idea to bring it up early on - as early as the interview stage. Especially if your prospective employer offers you a salary below market rate. Why not push for shares to make up the difference?

Or even if you’ve been with the company for a little while, nothing is stopping you from broaching the subject. Better late than never, as they say.

There’s no reason why asking for equity as compensation shouldn’t be par for the course. But speaking from experience, unless you’ve worked at a startup before, you wouldn’t necessarily think to bring it up.

Let’s change that.

How many shares should I ask for? 

I hate to say it, but it really depends on who’s asking and when.

Typically, a pool of 5-20% of the company’s total equity is set aside for employees and other key players.

And within that, specific amounts are earmarked for particular roles, early joiners and future hires. That’s where your shares will probably come from.

(Our Equity Sharing Calculator helps founders figure this out).

Usually, more is allocated to a company’s first hires, as it’s likely they took on a significant risk by joining so early on, and they’re the ones who build the foundations for the future. For example:

• Key early hires: 1-3% each
• Senior management: 0.5-1% each
• Employees: 0.05-0.5% each

This is useful to know so you can gauge whether you’re getting a fair deal, but do take these percentages with a pinch of salt!

Although 0.05-0.5% might not look like much as a percentage, if the company grows as everyone hopes, that could be a significant payout later down the line.

We've covered why to ask for shares, now it's time for how.

Mastering negotiations

The word "negotiation" fills many people with a sense of dread. But you needn’t be afraid.

Think of a negotiation as just a conversation, not an Andrew Marr-style interrogation.

Here are our top tips for asking for shares in a startup and positive ways to approach it.

1. Be prepared to educate

The first step depends on how familiar the employer is with share schemes. They might be pretty clued up, in which case there’s no need to teach them to suck eggs. 

There’s a chance they may have had a previous bad experience trying to set one up (something Vestd set out to solve).

That said, despite the uptake in the last decade or so, many business owners are still totally unaware of the schemes available to them.

Share schemes come in different flavours; broadly speaking, there are share schemes and then share option schemes. 

As for which scheme the business is eligible for, well that depends on the industry, the size of the company and what stage it's at.

For instance, Enterprise Management Incentives (EMIs) are specifically for UK SMEs and startups with fewer than 250 full-time employees. It's the most tax-efficient scheme by far, and companies can entirely offset the costs of setting one up.

It's up to the business to decide which scheme is best for them. But there’s no harm in showing them the possibilities nor the benefits.

The person you speak to may not be the decision-maker but rather the person whose job it is to convince existing shareholders. If that's the case, we have a free business case they can put to the board.

Remind me, what are the benefits?

We commissioned an independent study of 500 founders, owners, partners and executives to gauge how many share equity with their team.

Those who do share proceeded to tell us the benefits. Loyalty came top of the list, with most respondents seeing a significant improvement in their employee retention rate. 

Motivated by a shared goal, employees are more likely to care about the company and support each other, contributing to that all-important positive company culture.

If that's not impressive enough, bring up the fact that a share scheme is a fantastic way to attract talent.

Celia V. Harquail PhD, author of Feminism: A Key Idea For Business & Society, recommends having multiple examples ready of peers in similar situations, the kind of equity they offered and how negotiations progressed.

You could always share Hannah's story with them:

2. Talk about the bigger picture

By talking about shares and options, you’re positioning yourself as someone invested in the future of the business, ready and willing to contribute to its success.

If you're a candidate, it will set you apart from the rest, and if you're an existing employee, it will highlight your commitment to the company. 

With most schemes, employers can define parameters that determine how and when equity is released.

Instead of giving shares right away, an employer can issue options that the employee can exercise at a later date, subject to the completion of specific conditions.

‘Exercise’, by the way, is just a fancy way of saying ‘purchase’.

In other words, you can agree on conditional milestones to meet relating to the role or areas of the business where there's room for improvement.

For example: A Head Of Sales might aim to deliver £2m of new revenue. When that happens, 'X' proportion of their total allocated equity will vest (they earn it).

But don't worry if sales aren't your thing. The conditions don't have to be sales performance-driven.

For instance, a web developer joining a tech startup may have a deadline to launch a new website. Every employee adds value in one way or another.

By agreeing on set goals, you're demonstrating how you intend to contribute to the company. And the employer has the reassurance that conditions are in place to protect their equity and the promise of deliverables that will grow their business. 

You can even share our free guide to conditional equity with them. Conditional equity is a win-win for everybody and risk-free from the employer’s perspective. 

As Jana Rich the founder of the Rich Talent Group puts it:

The best negotiation is when both sides feel like they've won.

3. Know the lingo

If you successfully secure equity as part of your compensation, then be sure to meticulously read through all documents to understand: 

1. How everything works
2. How many shares you’ll receive
3. What conditions (if any) apply?

If offered an option scheme, then learn the difference between exercisable options and exit-based options. Your employer will most likely outline a vesting schedule, which could impact your career plans.

For instance, it may be that you need to be with the company for a minimum of 12 months before any options vest. You might see this expressed as a one-year "cliff". The idea behind it is to retain employees by rewarding them for sticking around.

Don’t be afraid to ask your employer or an independent advisor if you're unsure.

You're welcome to check out all of the resources available on our website.

While primarily aimed at the people issuing the shares, reading through a few of our guides and jargon busters will help you become familiar with the lingo.

4. Be realistic

If the first conversation doesn’t go your way, don’t be disheartened.

There could be all kinds of reasons why equity either isn’t on their mind, a priority or immediately possible. Decision-makers are usually swimming in a sea of admin. And as mentioned earlier, there may be other people they need to persuade.

Treat a conversation about equity the same way you would a conversation about salary.

Set a date to revisit the topic in the future. If at first, you don't succeed, take it on the chin and try again.

You can always make a counteroffer. Remember, compromise is key; find a way to mitigate any concerns they have about sharing ownership. That might mean agreeing to specific conditions or a longer vesting schedule.

Remind them of the benefits of an employee share scheme, not just for future you, but for the business as a whole.

Your five-point action plan

1. Go in with a positive mindset; it's a conversation, not an interrogation.
2. Highlight all of the reasons why sharing equity is worthwhile.
3. Talk about the bigger picture and impress them with your level of commitment.
4. Read up and feel confident you’re getting a good deal.
5. Be realistic about what's possible and when, and don’t be disheartened if things don’t immediately go your way.

And, if it all goes well and you receive a share agreement to sign, do your due diligence. If you're unsure about anything ask your employer or seek legal advice.

Best of luck with your negotiations!

How Vestd can help

Why not point your boss in our direction? We'd be happy to answer any questions they might have.

All they have to do is speak with one of our equity specialists - initial consultations are free and there's no obligation to sign up after. It's worth floating the idea, don't you think?