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How recruiters can accurately explain equity compensation to candidates

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You’ve interviewed some excellent candidates for your startup and the hiring manager has decided who they’d like to hire. Now it’s time to convince your top candidate to join your company, and explain why they should choose your startup over competing companies. How do you convince them that your offer is the most competitive?

At many startups, the deciding factor during hiring negotiations is stock options.

Successful recruiters need to confidently explain how stock options work, and how they’re different (and hopefully better) than the stock options candidates might earn elsewhere.

If you can accurately explain equity to candidates, you’ll not only be able to equip them with the knowledge they need to make a decision, but you’ll also show them how competitive your offer really is. After all, 75 percent of startup employees said that stock options were an important reason they joined their company.

Here’s how to do it.

Understand where most candidates are

Recruiters and hiring managers talk through job offers all the time, but their candidates have far less experience. Plus, many candidates are reluctant to talk about finances, or strongly negotiate an offer.

We regularly see candidates floundering to understand and negotiate equity. For example:

  • Candidates sometimes ask for more stock options, signaling that they know they should negotiate, but don’t know exactly what they’re asking for
  • Candidates go to places like Reddit, rather than the company, to get their equity questions answered
  • Candidates look at base salary as the primary compensation without considering the potential long-term gains of stock options

While this might seem like a win for your company, it’s actually in your best interest to make sure that your employees understand the equity they’ll be receiving.

That’s because 91 percent of startup employees say they would feel more valued if their company offered equity education, and 90 percent say they would be more likely to join a company that offers equity education, according to a recent survey conducted by Secfi.

In today’s competitive hiring landscape, sharing equity details is a competitive advantage. After all, there’s no standardized, agreed-upon-format for doing this — many companies simply state the number of options without explanation. Often, it feels as though companies are purposefully withholding information when transparency would help sell the candidate on the company culture.

If you want to accurately explain equity, you have to assume that most candidates have little knowledge about how it works. This is an opportunity to educate and inform. In fact, 88 percent of startup employees say it’s very important for companies to offer equity education, according to the Secfi survey.

Educate your recruiters and hiring managers

Although recruiters and hiring managers present offers to candidates all the time, they may not understand the ins and outs of how equity works. After all, it’s complicated.

Even so, 57 percent of companies did not provide the key details necessary for employees to understand equity. Your front-line team members are best-suited to be sharing these details.

To better serve your candidates, you’ll want to educate recruiters, hiring managers, and other company leaders about your equity offerings.

Here are a few ways to provide this education:

  • Offer equity workshops to help leaders get up to speed
  • Provide scripts and examples of how equity would play out, should the company get acquired or go public
  • Include standardized materials about equity within each offer, and make sure team members understand this material inside and out
  • Give support. When hiring managers don’t know the answer to questions about equity, they should have a go-to support person to tag in
  • Be ready to field equity questions
  • More than just explaining the value of the offer, teams need to be able to effectively answer equity questions, especially in the case of competitive offers

They should be able to clearly communicate why 10,000 shares at their company is worth more than 100,000 shares at another. They should also communicate that equity education is a benefit: "We'll help you make a plan and be informed about making a decision when it is time to exercise."

Not only that, but equity is often highly personalized, and candidates may need someone to walk them through their scenario. After all, equity isn’t like a salary with a straightforward number. Instead, it's more like buying a house. Candidates need all the relevant information to make an informed decision.

Here are common equity and stock questions that your team should be able to answer:

  • What type of options are you offering?
  • What is the strike price?
  • When was the last fundraising round and what did it value the company at?
  • What is the most recent 409A valuation and when was it calculated?
  • What percentage ownership of the company do these options represent, and how are you calculating that number?
  • What is the vesting schedule?
  • Is early exercise allowed?
  • When do the options expire?
  • What happens if I leave the company?
  • Does the company offer tender programs on a regular basis?
  • Do you offer any education about understanding my options and how to exercise?

It’s a good idea to create a document that answers all of these questions, so that team members can reference it when they’re talking with candidates. You can provide references within this document as well, so a team member can learn more or provide resources to candidates.

Perfect the offer letter

You’ll want to make sure your recruiters and hiring managers understand your equity offerings to answer questions. But you can also educate candidates directly in the offer letter.

Most startups will present the number of options with legal language that "price will be determined after the Board of Directors approves the grant" or something similar. Sometimes, startups will say the equity is worth a certain amount without explaining how they've come to that conclusion. These aren’t enough details for most candidates.

In your offer letter, it’s a good idea to include educational materials about equity that include the following information:

  • Value at last round (based on most recent 409A)
  • Fully diluted ownership of company
  • Value at unicorn stats ($1BN, assuming no further dilution with the caveat that it's just an estimate)
    A graph of what the options could be worth at the next round of funding and various exit scenarios
  • Information about ongoing equity education that will be provided (for example, workshops will be provided on an annual basis and if the company goes public we’ll provide connections with tax professionals)

Continue to provide education

Once your candidates come on board and join your team, the work is far from over. To provide education, you’ll want to hold ongoing education sessions, especially ahead of funding rounds, new valuations, or a public offering.

Helping employees understand equity is an important way to retain the great minds that make that equity so valuable. It’s not something to skimp on.

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