As startups shift from their “growth at all costs” mindset to a more sustainable setup, cuts have been made. Layoffs have created a sense of unease in the workplace. Companies keen to boost morale amongst those left behind have turned to equity.
A recent report by equity ownership solution, Ledgy showed that twice as many companies in the U.S. and Europe had allocated equity to their employees in the past year. Over half planned to make a more generous equity allocation in the year ahead.
“Equity is a fantastic lever to align the whole company around the same mission and vision. Companies and founders know that markets move in cycles: people’s equity will be there for them on the other side of this downturn,” said Joe Brennan, Communications Lead at Ledgy.
“What matters is how well companies communicate with the team about their equity stakes, making sure people are aware of the value of their equity and the potential upside, but making sure to be realistic about expectations and scenarios for potential exits.”
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Europe is now considering equity more than ever.
Startups took a hit to fundraising in 2022. Fewer than 40% of companies in France and Germany said they had raised money in the past 12 months. While the UK fared slightly better, the fintech industry still saw a drop in investment.
Despite this, most founders said they were considering their teams’ equity, up significantly from the year before.
Historically, Europe has lagged behind the U.S. in allocating employee equity. Brennan explained that this could be due to the number of different regulatory frameworks, national borders, and currencies in the European market.
“This has added a lot of complexity for companies setting up and scaling employee equity internationally,” he said. “It also means it’s harder to get to authoritative benchmarks for what equity package you should give to, say, a mid-level software engineer in Berlin or a senior salesperson in London.”
However, this looks set to change as more employees have been seen to be demanding equity make up a part of their compensation packages.
“In Europe, equity is now expected in tech companies, not just a nice-to-have,” said Brennan. “This means companies know they need to offer equity to stay competitive for the best talent.”
“Also, more of the top U.S. VCs like Sequoia Capital are moving into Europe. They are bringing a set of expectations on equity over from the US, where the assumption is that a significant chunk of the business – between 15 and 20% – will be allocated to employees.”
The U.S. puts equity as a high priority
While weathering the funding drought more successfully than Europe, the U.S. market has also faced significant challenges. However, equity was only marginally affected.
Compared to the previous year, 76% of firms planned to make employee equity more generous over the coming year.
The U.S. market also outpaced Europe in their allocation of equity to employees, with most firms setting aside 15%-20% for their teams’. In Europe, the allocation was much lower, with most firms in Germany and France opting for between 5% and 15%. These metrics remained relatively stable over the past year.
“Equity becomes even more important in a downturn,” said Andreas Goeldi in an interview with Ledgy CEO Yoko Spirig. “It’s interesting because maybe in the last few years, you had people joining startups with a bit of a ‘get rich quick’ mentality. IPOs might be further away, and the tech bubble of the last couple of years has kind of burst.”
“So how do you incentivize people more patiently, more focused on the long term? The answer is equity – it is designed to reward people for their efforts over years, not months. Your important team members will be with you through thick and thin, and you have to find strong levers to reward them for their efforts.”