Who Needs Equity Refreshes?
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A common situation at a growing startup: Your business is growing fast, and you’ve hired a few dozen people over the last few years. All of these employees received equity grants when they were hired, and as time has passed they’ve vested significant portions of that ownership. These are now some of your most tenured and valuable team members – how do you ensure that they stay motivated?
First, you should establish an equity program with regular refreshes. But as you’re putting that system into place, you’ll need to decide which employees need to receive more equity on a case-by-case basis. Here are the scenarios to lookout for:
- Employees with too little equity vesting in the coming year
- Employees with too little equity left to vest overall
- Employees who’ve been promoted
- Top performers whose equity is underwater
Employees with too little equity vesting in the coming year
Employees who will vest relatively little in the coming year are at immediate risk. If you’ve set up compensation bands correctly you’ll already have guidelines for how much you expect employees of a particular level to vest. For anyone already below that number, consider an equity bump that will get them back up to par.
Employees with too little equity left to vest overall
This is a more subtle situation. Sometimes, you’ll have employees who stand to vest a lot of equity over the next year, but whose equity vesting will fall off a cliff afterwards. What will a rational employee do in this situation? Many of them will realize that this cliff is coming and start testing the job market. Employees don’t necessarily trust that their employer will come through and grant more equity, and even if they do, the grant might be smaller than what they could get in a hot market.
To model this scenario, look at the total amount of equity that employees have left to vest, across all grants that they have received. As a general rule of thumb, you should try to ensure that employees never fall below roughly 50% of the equity value that a new hire at their level would receive. We’re here to help you visualize these scenarios.
Employees who’ve been promoted
When employees are promoted, they should get an additional equity grant so that their vesting reflects their increased value to your team. It can be fine to wait until the next time that an employee is due for a scheduled refresh before making additional grants as long as they don’t need to wait more than a few months. However, you should avoid waiting too long. Every day that a newly promoted employee spends in their new role, they’re building valuable experience that increases their value in the market.
Top performers whose equity is underwater
Occasionally, companies end up in the unfortunate position of having their equity value decline. A fall in valuation can lead to employees’ stock options being underwater (ie, the value of the stock is lower than the strike price). This creates significant attrition risk.
Don't forget to think about refreshes if your stock price has fallen. You probably can't afford to make everyone whole, so focus on your top performers and try to get them as close to their band as your budget allows.
Conclusion
Of course, a well thought through equity program will account for these and other scenarios to ensure that your team is compensated fairly. But if you’re still in the process of formalizing an equity grant system, use these rules to identify hotspots on your team where more equity is needed.
