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4 Considerations To Craft Your Company’s Equity Strategy

Expert insights on how to value equity in this market, transition from options to RSUs, and rethink refresh grants.

The conversation around equity these days feels…complicated. For the companies that raised their last round at the market peak in 2021, what are those shares worth these days? Do stock options still make the best sense for private companies? And are refresh grants in need of a shakeup?

These are just a few of the questions on the minds of CFOs and CHROs who must work together to craft a cohesive equity strategy for their company. While CFOs navigate the delicate balance of valuation and dilution to protect stakeholder interests, CHROs artfully integrate equity incentives to attract and retain top talent, particularly as the role of equity in total comp continues to evolve.

In a conversation with The Circle, Ashish Raina, Compensation and HR Consultant at Optimize Talent, Sam Adams, Head of Issuer Strategy and Excellence at Morgan Stanley at Work, Mohit Daswani, CFO at ThoughtSpot, and Pam Holmberg, former VP of People at ThoughtSpot, discussed “all things equity” with a focus on the community’s biggest challenges. Here they share their insights on how to value equity in the current market, move from stock options to RSUs, and rethink refresher grants.

Market Sentiment: Tension From All Sides

To describe the current state of the startup equity market, Ashish took a line from Charles Dickens – it is the best of times and the worst of times. 

“For employees, there may be doubt around the value of equity.  For investors, they might want to hold onto equity more tightly because they can’t give it out as generously as they once did.” – Ashish Raina, Compensation and HR Consultant, Optimize Talent

These sentiments, framed against a backdrop of companies reducing burn and dilution, have led to pressure on all sides. Some companies are waiting longer to grant employees equity since they have a limited cash runway and need to curb expenses. But that inhibits how a company can attract new talent.

In a recent survey of executives in The Circle, 67% of respondents said the main objective of their current equity strategy is to attract and retain talent. Only 13% said its main objective is to drive performance.

Whatever your focus, the VIPs agreed that there must be a clear strategy and “why” behind equity. Equity is about potential and, in a private company, that often means ramping up to build something great and drive future growth. Make sure your equity philosophy aligns with your company’s performance metrics, values, and culture, and is reflected in your approach to total rewards.

Employee Perception: Education is Crucial 

Equity often feels like table stakes at a private technology company, and yet employees often don’t fully understand its value. Many people have prior scar tissue from poor equity administration, unexpected tax burdens, or disappointment in eventual sale price. All of these factors and more can cause employees to disregard or underestimate the potential of their equity. 

“Companies spend a lot of time and money on their equity offering, so investment in the positioning and education is important. There should be ongoing education for employees that maps to milestones in your company’s overall calendar.” – Sam Adams, Head of Issuer Strategy and Excellence at Morgan Stanley at Work

This education extends to valuation corrections and explaining how some equity can be worth less than it was a few years ago. Continued economic volatility and a tepid IPO market also have many private companies exploring options for secondary liquidity.

Another important consideration for your equity program is to be clear on who wants and values equity. It might be assumed that everyone does, but certain employees, such as those in more junior or sales-focused roles, might prioritize cash. The same could be true for those who work outside the United States. 

Finally, use hiring conversations with candidates as a learning experience for your equity ranges. What are they seeking for the role? And how did they react to the equity package you offered? At her previous companies, Sam and her team used these first-party data points to build their own equity benchmarks. Because, as all of our VIPs agreed, no third-party data is perfect on its own.

Equity Structure: Potential to Evolve From Options to RSUs

To determine the present and future value of ThoughtSpot’s equity, Mohit uses a formula that takes into account the company’s annual revenue growth rate, the trading multiple of comparable high-growth software companies, and the environment for private companies. Based on this calculation, Mohit and team have determined the price-per-share for annual RSU grants. 

ThoughtSpot raised a Series E round in 2019 and a Series F round in 2021. In 2021, the company moved from stock options to RSUs, which were a cleaner form of equity from an employee perspective and also less dilutive than traditional options. 

“Now that we moved from a percentage of ownership to a ‘share + dollars = value’ perspective, it is easier to explain the value of equity to employees.” – Mohit Daswani, CFO, ThoughtSpot

While the trajectory of the company and ARR comparables help employees better understand what the value of their shares could be worth in one to two years, Mohit stresses to his team there is only one number to be concerned about. 

“What matters, ultimately, is the price when you sell your shares,” he said. 

Refresh Grants: Seeking Alternative Approaches 

The method of using refresh grants to retain top talent is an important, albeit expensive, one. A new hire who receives 25% refresher grants per year will double their total amount of stock relatively quickly. That adds up across a company. 

This year, ThoughtSpot has evolved its own equity program for everyone to a set criteria that factors in both performance and percentage of unvested shares.

“This allows our top talent with a low percentage of unvested shares to receive a larger amount. That approach has allowed us to be judicious with the number of shares we give while still maintaining a broad-based employee equity program.” – Pam Holmberg, former VP of People, ThoughtSpot

The trickiest conversation about refresh grants can often be the one you have with your company founders about what should be their grant totals. There is no perfect formula for this, but, if the founders play distinct roles as executives, look at their refresh benchmarked to that role. 

The Takeaway:

There are a wealth of factors to dissect to find the most effective equity strategy for your team. These considerations include educating your employees on the value of equity in this market, evaluating whether an options or RSU approach works best, and ensuring that your refresh grants reward your top performers. Be willing to flex in this market as to what works best for your employees and your company. What worked today might need to be reimagined tomorrow.

Apply to join The Circle to participate in conversations like this one within a private leadership community of CXOs.

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