How to negotiate equity as part of your compensation
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.
Speaking of salary, according to a new study employees with a lower salary with access to an employer’s share ownership scheme are approx £10k wealthier than those without access.
If you are joining a business in its early stages, an employer can offset market salary with higher equity. Given the current climate in the wake of COVID-19, lots of companies are doing exactly that, preserving cash flow at the same time. If you are offered below the market rate, why not push for shares to make up the difference?
Money aside, employees that are shareholders are more likely to contribute their very best. If the whole team are shareholders, imagine what that does to team morale and collaborative efforts.
It's a good idea to bring up equity early on, perhaps at the interview stage. But nothing's stopping long-term employees from asking either. Better late than never, as they say.
We know full well that the word "negotiation" fills many people with a sense of dread. Think of a negotiation as just a conversation, not an Andrew Marr-style interrogation. Neither is it finite; it can be an ongoing discussion that's positive for both parties.
Here are our top tips for negotiating equity in a startup, private company or even as part of a job offer. We've shared some of the reasons why employee share schemes are beneficial (which you can bring up in conversation) and positive ways to raise the subject with an employer.
Be prepared to educate
Eligibility for the various employee share and option schemes depends on the industry, the size of the company and what stage it is at. For instance, the EMI option schemes are available to many SMEs and startups, are incredibly tax-efficient, and companies can entirely offset the costs.
Traditionally setting up a scheme has been time-consuming and costly, usually involving lawyers and accountants; this is where the Vestd platform comes in. We’ve digitised the process to make sharing equity simpler and at a fraction of the cost that companies typically payout.
With all this in mind, we can see why lots of founders aren't familiar with the options available to them. An employee share scheme may not be on your employer’s radar at all, so be prepared to provide valid reasons why it should be. At least for you!
It's up to the employer to decide which scheme is best for their business, but nothing's stopping you from raising the following.
We commissioned an independent study of 500 founders, owners, partners and executives to gauge how many share equity with their team. Those that do share proceeded to highlight the benefits. Loyalty came top of the list, with most respondents seeing a significant improvement in their employee retention rate.
Employees overall are also more productive and aligned as a team, thanks to the Ownership Effect. Motivated by a common 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 an employee share or option scheme is a fantastic way to attract new talent.
Come across as educated as possible. 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.
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 an applicant, 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 approved schemes, employers can define parameters that determine how and when equity is released. Instead of giving shares right away, an employer can issue options exercisable at a later date, subject to the completion of specific conditions.
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, someone applying for a Head Of Sales position could aim to deliver £2m of new revenue in order to release the full allocation of equity.
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 one way or another.
By agreeing on conditional equity milestones, you're demonstrating how you intend to add value long-term. 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.
As Jana Rich, founder of the Rich Talent Group, puts it: "The best negotiation is when both sides feel like they've won". Conditional equity is the perfect way for everyone to win, based on your contribution to the business. These schemes are risk-free, from the perspective of the employer.
Understand the lingo
If your employer is willing to explore employee equity schemes like EMIs or Growth Shares, then fantastic. If you secure equity as part of your compensation, then be sure to meticulously read through all documentation to understand how everything works, as well as any performance-based conditions that may apply.
If offered an option scheme, then know 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 are vested. You might see this expressed as a one-year "cliff". The idea behind it is to reward employees who plan to stick around.
Don’t be afraid to ask your employer or an independent advisor if you're unsure. Various resources are available on our website, including downloadable guides and jargon busters. While primarily aimed at founders, reading through a few will help you become familiar with the lingo.
Be realistic
If the conversation doesn’t go your way the first time, don’t be disheartened. There could be all kinds of reasons why equity isn’t on their mind, a priority or immediately possible. Decision-makers are usually swimming in a sea of admin. And don't forget, there may be other shareholders 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 counter-offer. Remember, compromise is key; find a way to mitigate any concerns they have about sharing ownership. Remind them of the benefits of an employee share scheme, not just for the recipients but for the business as a whole.
Like we said, think of a negotiation as a conversation. Go in with a positive mindset and be realistic about what's possible and when. Know the lingo, so you sound knowledgeable. Highlight all the reasons why sharing equity is worthwhile. We're more than happy to as well. Talk about the bigger picture and how you want to contribute to the company's success in the long run.
Best of luck!