Open Letter: Protect employees amidst tech turmoil
Founders need to be more transparent with their employees about what a fall in valuations means for their equity
When employees have a stake in the success of their company, they’re more likely to be committed, motivated and engaged by the company’s mission. Ledgy data suggests that 84 per cent of tech employees with equity say their ownership makes a tangible difference to their motivation.
And, of course, team members can look ahead to realising significant gains on their ownership stakes if the company lists on a public exchange or gets acquired.
But turmoil in the tech market has left many firms and investors to take drastic action to protect their business, often without considering one of their largest shareholders - employees.
Some founders give away as much as 20 per cent or 25 per cent of their business to employees. Despite the size of their shareholding and the importance of their role in the business’s growth, employees often have no say or board representation. They effectively have no power or sway to protect their investment.
We are calling on tech firms to educate their employees about their equity, be transparent about its value, and – if the company reaches a crunch moment relating to personnel, fundraising or exit events – do everything possible to protect employee equity during this challenging time.
Educate and be transparent
Employee equity is complicated and many employees lack equity financial literacy. A recent survey found that 44 per cent of people with STEM degrees were unable to correctly answer a single question related to startup equity compensation.
While employees can understand falling tech valuations, many have no idea what this means for their equity.
Many aren’t aware that their share options are now underwater. They also don’t know that often investors are better protected than them because of their preferred shares, which rank above the common stock held by employees and their liquidation preferences. Too often, this information is kept from the team.
At any given time, employees should know whether their equity is in or out of the money as per the last funding round or the most recent valuation.
If you’re giving people bad news, founders and leaders must explain why they should still be excited and ambitious for the long-term success of the business. Not communicating now will only create bigger problems down the line.
Protect your team’s equity – even if they leave
Large tech firms like Stripe have moved to protect employees, even at the expense of their valuations, raising capital to provide liquidity and prevent RSUs from expiring. Companies doing this send a clear signal that they are building for the long term.
By contrast, the use of restrictive terms and conditions that prevent employees from selling their equity highlights that short-term valuations are more important than employees’ ownership stakes.
Companies need to show people they care about distributing ownership. This means scrapping overly restrictive leaver clauses that take away people’s equity when they leave the company – even options that have already vested.
Thousands of tech employees have been through layoffs and periods of great uncertainty. They don’t deserve any more nasty surprises. Transparency, education and progressive equity clauses will keep teams motivated and ready to build. Not taking these steps risks a crisis of morale that could be fatal.
Yoko Spirig — CEO, Ledgy
Mathias Pastor — Co-founder, Semper and VP Secondaries at Crowdcube