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Should I give equity to early employees? Yes, here’s why

Should I give equity to early employees? Yes, here’s why
Should I give equity to early employees? Yes, here’s why
5:20

Last updated: 19 April 2024

If you believe that your team deserves a slice of the pie, we salute you. Not every founder is that way inclined. And that’s fine, but they’re missing out.

Founders of early-stage businesses often think that it's not the right time to set up an employee share scheme and instead wait until the company has grown considerably.

But in many ways, it's better to start sooner rather than later. Here’s why early-stage startup founders should seriously consider giving equity to their team, when and how.

Should I give early employees equity?

The choice is yours but every study we've come across (and our own data) proves there are so many reasons to do so. Employees with shares or share options are more likely to:

  • Be in it for the long haul
  • Work well as a team
  • Be happy and engaged 
  • Feel motivated

As opposed to employees without. In fact, a whopping 95% of Vestd customers with Enterprise Management Incentives (EMIs) believe that it’s helped improve employee loyalty.

An EMI scheme is just one of the ways that founders of UK-based SMEs can leverage equity to improve retention, enhance performance and more. There are different employee share and options schemes to meet different business needs.

Losing a key player from a small team in the early stages can be detrimental, especially if you need all hands on deck. Sharing equity with early employees can potentially mitigate that risk.

Share and option schemes are also a great way to entice new applicants. When we teamed up with YouGov to find out what Brits want:

One third told us that a company share scheme would tip the balance when choosing between two otherwise identical roles.

As founders of startups know all too well, recruitment isn’t easy. But a share scheme can enhance a company’s recruitment strategy to attract and retain talent early on. Founders can leverage equity instead of offering unsustainably high salaries in a bid to compete with the big leagues.

But when is the right time to give equity to employees?

When should I give employees equity?

From an employee perspective, it's as soon as possible

By doing so, it gives employees the maximum possible upside. They want it when a company is valued at a lot amount, as they will profit most from the growth in value.

As for founders, what better way is there to inspire early employees early doors than with the prospect of a reward later down the line? Use equity as a long-term incentive to encourage your team to contribute to business goals over time.

With that long-term mentality in mind, an employee share scheme is arguably better than a bonus, which is more of a one-hit-wonder kind of motivator. And certainly not as tax-advantageous as schemes like EMI or growth shares.

How do I get buy-in?

Though a founder might be passionate about the idea of sharing ownership, early-stage investors (like friends and family) might be reluctant, fearing the impact it will have on their shares (dilution).

You may need to educate and put forward a business case. You're welcome to use ours.

Whereas investors like VCs may expect, or even insist, that an option pool or share scheme is in place before they invest.

Why? Because they may want to protect their share from dilution or because they understand the positive impact an employee share scheme can have on overall business value in the long run.

A quick note on dilution. As long as you make smart decisions about your equity, dilution is nothing to be afraid of. What matters most is the value of each share and how much a recipient's pot grows to.

And another thing, share schemes can be conditional. That means that before recipients can reap the rewards, they have to meet mutually agreed milestones. Stay with the company for a certain period of time, pass probation or achieve a performance-related goal, for instance.

This conditional element will help reassure existing shareholders and investors.

Make it part of your company's employee benefits package and explain everything in layman's terms. Celebrate the fact, that you want your team to share in the company’s success. And regularly remind team members of what they stand to gain if they stick around.

OK, what's the best way to do it?

A share scheme platform is by far the simplest way to set up a share or option scheme.

Many founders have shied away from setting up a scheme in the past, viewing it as a mammoth task. And for good reason - the traditional way is complicated, costly and time-consuming. Using a digital equity management platform is a lot less hassle.

On Vestd, employees have access to their own dynamic dashboard. There they’ll find a real-time cap table and other useful features like the ‘projected share price’ function to help them understand the future potential of their shares.

That level of visibility benefits platform admins too, and makes managing share and option schemes far easier.

So, should you give equity to early employees? Ultimately, only you can make that decision. But as we’ve touched on in this article, there are plenty of reasons why it makes commercial and philosophical sense.

Want to know more? Talk to one of our experts.

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