7 myths about employee equity

So, you’ve stumbled across our page because you want to know if you’ve been duped by your employee equity plan. Or maybe you’re a founder and you’re embarking on setting up your equity plan and need some inspiration. If either of those rings true, welcome to Pomelo - we’re the employee equity advocates and experts. We’re named after a fruit and we constantly need to explain why (more on this here). But we also care about the start-up ecosystem and the employees that are bold enough to want to work in a high-paced game changing start-up.

When it comes to setting up employee equity plans there are a lot of things that need to be clarified. The more we talk to both founders and employees the more we realise what disconnect there is, and just how much we need to be acting in this space, to clear the fog and give everyone a fair slice of their own Pomelo. The fact is, start-ups need to think about giving away equity as positive thing - and shouldn't be reluctant to use it in a positive way.

In this article we’re going to go over the 5 common mistakes or myths about employee equity.

1.The longer the vesting period the longer they stay

This particular point grinds our gears. We’ve seen start up’s utilise ridiculously long vesting periods in the hope it keeps their employees at the company for that long. There is an element of truism that a vesting period can incentivise employees to stay at companies, but if it’s too long - it’s so far in the future it becomes incomparable and irrelevant to an employee.

A vesting schedule sweet spot should sit around 4 years. 4 years is not a crazy time in the scheme of things. It falls under the question “where do you see yourself in 5 years” comfortably. It’s long enough to make serious strides within a company and it’s also a comprehensive time frame that both incentivises but isn’t so demotivating with it’s sheer distance.

We’ve talked to some employees who have 10 year vesting schedules, and it’s safe to say not one of them stayed at their respective companies for 10 years. That's a massive chunk out of your life and career - and if you’re over the job, it's too long to even fathom hanging in there for a chance to get your percentage of equity vested.

2. They’re designed to lock people in

Similar to the above, some founders think that BECAUSE they’re giving away equity, they need to make sure that employee stays at the company forever to make it worthwhile. This is not the mentality to have by any means. The fact is start-ups typically pay lower salaries, often don’t give away pensions, don’t have the cash to give out bonuses and often don’t have all the other perks larger companies have the resources to offer. Equity is your sweet ticket to attract talent who may actually be looking elsewhere. In the US equity in start-ups is a necessity for anyone to consider taking any particular job in the competitive start-up marketplace - and the UK is slowly dragging its heels to adopt this mentality DESPITE the second largest start-up ecosystem being London (after Silicon Valley). The way you should be thinking about giving away equity is primarily to attract the talent you need, and secondly because the talent you do hire is giving up a lot to work for you, and are ultimately going to help you make or break the business. Equity gets them invested, yes, but it should not be a set of handcuffs, it should be to celebrate their hard work and the company's overall collective achievement. This is another reason why we are big advocates for time-based equity plans and not exit-only. You should be realistic that employees do move on, it’s the nature of employment, yet that should not undermine the work and effort they did put into the company for the period of time they worked there - meaning they SHOULD be able to take their vested options with them if they move on.

3.Everyone understands it

Now this is probably the most common problem we’ve seen. It's all well and good to get those first two points I mentioned right, but if you just give the equity to your team and wipe your hands of it, it’s only going to get the job half done for you. 80% of employees surveyed did not understand the equity they’ve been given. 80% is a whopping percentage, and how the heck can you expect your team to be excited and motivated by something they don’t understand? That's like asking someone to bake a cake without baking powder. You’re never going to get it to rise, and you’re going to be left with a dense rock-like cake.

Not all employees come from a financial background, and most of them won’t even play around in the stock market  - yet you expect them to grasp this extremely complex sub-set of finance?

This is where we can really help you make a difference, consider Pomelo the baking powder of your cake recipe. Educating your team on their specific scheme, the terms included and what they can expect now and in the future is so pivotal to making sure they get how epic it is you’ve just given them equity. This is how you motivate and retain your top talent, NOT through long vesting periods and exit-only schemes.

4.The employers always have the employees best interest

We wish we could say this was true, and for some founders it definitely is! But we sadly see many who really do want to try to keep as much for themselves, and see equity as a privilege for loyalty and longevity at a company, rather than an insensitive and perk for hard work achieved and time previously served. In our perspective we really think equity should be seen as a positive tool to reward, motivate and get your team on board with the long term vision not only for the company's success but theirs as well.

On the flip side of this it’s also hard for founders to find the time to create employee centric schemes. The reality is it’s not something that can be achieved with finding a template online, and lawyers don’t have the industry expertise to consult on best practices - although they certainly can make the legal document. This is where outsourcing to a dedicated party (cough, like us) can really do wonders, we not only understand what criteria should be in place - we also have industry data and can handle more than just flicking you a template and saying good luck.

5.That it’s not complicated to set up

As touched upon above, if you want to create an effective scheme it’s not just a copy paste endeavour, especially if you’re vying for a complaint EMI with HMRC.

We have plenty of tips on the type of scheme to choose, compliance and timing - but the fact is these are all things that you will need to read up on and find out for yourself. It also requires lawyers, accountants, and a little understanding of typical equity amounts for roles. If you want a scheme that is good for you, good for your team and good for the HMRC it’s going to require a lot of time on your part if you try to do it yourself (even using lawyers and Seedlegals means you will end up doing most of the thinking and building out of the “plan” yourself). Maybe this is something you want to tackle and up skill on, or maybe this is something you’d rather outsource so you can focus on your business. Either way if you’re stuck feel free to give us a call and we can talk you through some of the process.

6. Delivery doesn’t matter

Now, what happens after you’ve created the scheme? Do you just hand it to your employees and get them to sign? Well this is one option but we think there should be more involved than this. As we touched on earlier 80% of employees don’t understand the equity they’ve been given, so getting them to be excited about what they’ve received should probably also involve a little education too.

Aside from this we really see the most benefit in the delivery when founders make a big deal about it. You’ve essentially made your employee a potential part owner and given them something worth a lot of money!!! Shouldn’t that be something that’s celebrated?! Yet the standard is to hand them a piece of paper filled with jargon. This is one part Pomelo really makes sure to prioritise - first step being making sure they understand the concept of options and equity, second step making sure they understand their specific scheme. Third step - pop the champagne and hype them up! If you’re not excited about it how can you expect them to be?

7. Continuous engagement doesn't matter

After the initial delivery, we also strongly believe that regular engagement is key to keep motivation high. More often than not, they get the scheme and it gets added to their stack of documents somewhere in the ether of their apartment and that’s that. It’s then very easy for them to forget when their options vest or to track the value of them as companies grow, get higher valuations and progress with their mission.

Having regular touch points at key milestones is pivotal to ensuring long term engagement and motivation with having options - it helps the employees feel more integrated and gives them reasons to be excited throughout their equity lifecycle.

We’re in the process of building a platform that really makes good on this aspect- with nudges, graphs and all that jazz so you and your team can keep tabs on everything equity with your business.

So, if any of the above was news to you, as an investor, accelerator, founder or employee - you should probably get in touch as we’ve got plenty more wisdom where that comes from.

The summary basically should be, think about your employees, help them understand it, and make sure you prioritise it. As equity can be such a great tool for retention, motivation and to get your key team members to join you on your start-up journey in a whole new way.