Understanding Equity, why education is so important and why isn't it happening

Benjamin Franklin once said; “An investment in knowledge pays the best interest”. Which is so aptly applicable in this context. Within the Start-up equity universe this is one thing that we see as the major problem and current disconnect - no one truly understands equity past a vague concept. When breaking it down into more complex and abstract terms (i.e phantom shares, options, EMI etc) then people, especially employees, get even more confused.

When embarking on our mission we sent out a survey to a wide range of start-up founders and employees to get a better grasp on what they really understood about equity as a concept, personal finance, tax obligations and their own specific equity agreements and plans. The results were both surprising and not at the same time, we had a hunch this would be the case, but were disappointed to be proven right.

The top two takeaways were:

• Most employees stated that they did not even know what the details of their Equity plan were, or how much it was worth.
• Most founders stated they would try to do it differently next time, but didn’t quite know how to achieve that.
  

It was clear that neither party was educated on this whole equity & options concept in start-ups, with founders not knowing how to better leverage it for themselves and employees, and employees not really getting it once they got it. This, my friends, was how Pomelo was born.

Why isn’t Education happening for start-up equity plans?

We have some theories behind this question and the main one comes down to time. Time is limited for almost everyone we know - but that statement is even more true for start-up founders. When you’re bringing your business baby into the world you’re probably simultaneously doing 3 different C-level roles, while also being your own biggest hype man at networking events, conferences and what have you. You’re also trying to effectively manage and guide the rest of your team, not to mention set the direction of your business. Did that make you huff in exhaustion? Because I know I was exhausted just typing it.

Great founders are a special breed of human that are used to wearing many hats, stretching themselves thin and getting as much as they can done. That being said, equity plans are often at the very bottom of their giant to do list. Although they know it’s important, it doesn't have a direct impact on their day and the growth of their business…. Or does it? More on this later.

This basically leads to the fact that even once a founder has made the time to sort out their equity plan, either through lawyers, ad-hoc or begging investors to help, they do not have the time to run through it in the detail that is required for most employees, let alone consider and research the best way to put together their Equity/ options plan in the first place (which btw, is EMI - but that’s been covered over here)

Why Employees need more context

In order to appreciate something and become motivated by it, you need to fully understand it. This is no different when it comes to Equity plans. Most schools do not teach financial literacy, nor do universities (unless you study finance but they’re the minority in this case) and Equity and options goes beyond basic financial literacy. Yet founders are simply handing someone a document outlining an options plan and expecting them to understand what it is, how it works and all the implications signing it may bring (tax in particular is what we’re referring to here). It’s no wonder that it doesn’t end up engaging them, and in some instances could actually end up putting them off the whole thing. This is where education is needed most.

How do you educate?

Since we’ve already discussed how Founders don’t have the time to educate the employees themselves, they should give that job to us. Hi, we’re Pomelo (if you didn’t already realise, you’re on our website, reading our blog). By outsourcing to a dedicated party, you can trust your employees are in safe hands, to ask all the questions they need and also be guided through the process - from each term, what their specific vesting schedule is, how it affects them in the long run, and also get them excited about it (because heck we’re excited about it and it’s not even for us!!). At the end of the day receiving options is a pretty big deal for anyone, so it really needs to be treated like a big deal. We will do the metaphorical champagne popping for you (maybe even pop some of the real stuff) which only sets your employees up to be motivated and excited about working for not only the company's success, but their own success also. This also makes it extra great for employee retention in a super positive and achievable way for everyone involved.

What founders need to realise

We know you’re on your very own mission, with your very own BHAG, but in order to get the aforementioned motivation and excitement from your employees, your Equity Agreements need to be the right ones, they need to be set up at the right time (read this here for more info on timing) and they need to be what's right for your individual employees. That becomes a lot to think about, so much like letting us handle the Employee education and execution part, let us help you with your part too. We have all the information you need to make sure you’re making the right decisions based on the roles, percentages and what have you - and can also educate and guide you through the process to - making it pretty damn easy to get it right and then get cracking with your super engaged team on your very own BHAG.

Our BHAG is to make 100 employees millionaires from effective equity plans…. In order to get to that stage we also need some pretty epic founders who want to do that for them (knowing this also means good news for you and the success of your own business).

So, whatcha waiting for! Give us a call! Or an email! Send a pigeon or knock on our door. We prepped to get stuck into making the most out of everyone's slice - by helping them understand what it’s all about.

If you have any other questions around all this, you can also check out our FAQ page or some of the other articles - where we’re trying to demystify the whole equity thing for you.