Equity Compensation as a Motivator

The most popular tool to align employee and corporate interests is through options and equity (non-cash) compensation. Giving employees options or equity rewards is a way to provide long-term value to employees if short-term resources are constrained. On most basic terms, you are giving the employee a stake in the company in exchange for a reduced salary in the near-term.

Like all financial calculations, in order for the equity argument to make sense to the employee, the equity compensation offered must balance the risk the employee is taking to be part of your company. If an employee is giving up a $50K a year salary to work at venture making $25K, what reward will the company provide to make up for his loss? Giving him stock valued at $25K will likely not suffice, as there is a large risk associated with that stock. In this case, you might not only have to provide equity compensation to bridge the cap, but layout a plan so the employees have comfort that the equity will have value in the future (and the venture will succeed).

Thumbs UpTry This: Make equity distribution equitable. The worst thing you could do is over-reward one employee and short change another. Word will quickly spread of this imbalance.

 

 

Thumbs DownAvoid This: Don’t spend an overwhelming amount of time and resources (professional investment banks) in order to arrive at an equity valuation. Any valuation will be a theoretical estimate. It can never be completely accurate.

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