Learn everything you need to know about section 409A of the internal revenue code. From what is a 409A valuation to 409A methodologies and process.
Equity is one of the most valuable tools you have as a founder to attract talent to your startup. It is an opportunity applicants can’t get from any other job.
That said, there is a huge information gap between founders and most early hires about the benefits and pitfalls of owning equity. The best founders give employees a realistic understanding of what their equity is worth, while also highlighting what makes your company able to succeed. For help explaining equity to your employees check out our Equity 101.
Here are five tips on how you can create a culture of trust and shared risk-taking at your startup by being more transparent about equity.
1. It starts with the offer letter.
Too many founders give employees options without ever explaining what these options are worth. The whole point of giving an employee options is to get them bought into the future success of your business. There is a reason why early equity is often called “sweat-equity”. Everyone on your team is going to be working long hours with low pay in the hopes of a future payoff. Make sure your employees know what this payoff might look like.
To help, check out Carta’s open-sourced “Better Offer Letter.” You can use this template to explain how much you gave to the employee, what percent ownership their shares represent, as well as how much an employee will get paid based on different exit scenarios.
2. Don’t oversell the value of equity.
Nothing will erode the trust of your employees faster than over-promising on the value of the equity you are giving them. Even when your equity offer is light, if you are upfront about what the equity is worth, employees will respect you for sharing this.
We recommend that with every option grant you give, you offer the disclaimer that all equity is worth $0 until your company reaches a liquidation event. If you want to go further and note that even if the company exits at an unexpectedly lower value, preferred investors might get all the payout. Again, this clarity will help build trust with your employees, while encouraging everyone to grow the company.
3. Celebrate milestones.
Too often employees negotiate for options and then forget about them entirely a few days after signing their new hire agreement. You should send an email to employees when they pass their cliff (usually their 1 year anniversary at your company) and let them know their first set of shares have vested. This will be a powerful reminder that they are invested in the long-term success of your business.
You can do this manually while your company is small or automate the process by using software like, Carta, as your business grows. Check out just a few of the 100s of tweets we have gotten from happy employees vesting their first shares on Carta.
4. Educate employees on how to exercise.
As a founder, you likely know a lot more than the average employee about equity. You know how your options will be taxed when you exercise them and the potential tax savings from long-term vs. short term capital gains. To most employees, this will be a foreign concept. You don’t need to explain all the nuanced differences in the tax code to your employees, but you will gain a lot of respect for taking the time to teach your employees the basics so they don’t get screwed when exercising. Equity should be a perk, not a cost. However, you need to careful not to offer tax advice as this might leave you vulnerable to lawsuits.
5. Let employees know when a new round is closing.
Another easy way to help employees who own options is to let them know when you are fundraising and when you are about to close a round. When you complete an initial close, employees are locked out of exercising their options at the current price and tax levels. They will have to pay much steeper taxes on any future options they pay because the value of the company’s shares increased.
This is another incredibly simple way to educate employees, save them money and earn support.
Equity is one of the most unique and powerful benefits you get to offer in a startup. That said, if you give out equity and don’t explain it, you miss out on creating the loyalty and mutual investment that comes from employees understanding and valuing their ownership.
Follow the above steps to stand out from the crowd as a more enlightened and supportive founder.