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Why Educating Startup Employees About Equity Is As Important As Giving It

This is the final article in a three-part series on the benefits of giving all startup employees equity. See the first piece here and the second one here.

A year after I moved to Chicago, I attended a women’s networking event, where an employee of a recently-acquired startup entered the room. Folks were excited to see her, congratulating her on the exciting news and asking questions about what life was like post-acquisition.

Among other changes, she talked about how they were preparing to double their team to 50 people, leading me to believe that she was a rather early employee. I had never met her but was impressed by and happy to celebrate this 20-something woman who had helped drive a startup to a successful exit.

When she and I introduced ourselves, I congratulated her and said I hoped she did well in the acquisition. To my surprise, her response was to brush off my comment and say, “Oh, we’re not a publicly-traded company.”

I stood there, slowly realizing that not only did this woman not benefit from the acquisition that she certainly helped manifest as an early employee; she didn’t know that she could have benefitted from it.

As I mentioned in my first article in this series on startup equity, employees’ lack of understanding about equity is a common justification I hear for why Chicago startups don’t give it to them. And this is a vicious circle that we must disrupt.

If we never give employees equity, they will never have the opportunity to understand its effects and value. Giving and teaching employees about equity is not only the right thing to do for the people working daily to help founders and investors build a valuable company; I argue that it’s critical to helping foster an ecosystem that retains its best and most experienced talent.

Let’s consider the woman I mention above. She had no understanding of how startup equity worked or that she could be living a very different life today—at least one with less financial burden. Her perception of what it means for a startup to be acquired—which could have been a lucrative experience for her—is one of the most painful parts of an acquisition: merging two different companies’ cultures, adapting to more bureaucratic corporate policies and processes, and then experiencing the pain of layoffs. In fact, just over a year after the acquisition, I learned that she was part of the merged companies’ subsequent downsizing.

When we look at this woman’s experience through the lens of attracting and retaining experienced startup talent, why would she—someone who helped steward a company to a successful exit—ever join a startup again? She could instead go to a more established and stable company, earn a comparable (if not higher) salary, get better healthcare benefits, and not endure such emotional and operational volatility.

It’s true that people will have a difficult time fully grasping the opportunity that equity poses if they haven’t experienced or witnessed close-hand the effects of a liquidity event. However, the nebulous nature of equity and employees’ lack of understanding of it shouldn’t be a reason to not grant it. Rather, it’s on companies to help their teams understand and value the opportunity that equity poses.

In my experience, I’ve seen companies of different sizes handle this differently. When I was at Uber, new employees went through a multi-day on-boarding program at headquarters called Uberversity, where an entire session was dedicated to teaching new hires about what equity means and what it looks like for a company to exit.

It was led by a financial executive who did not, of course, provide tax advice but gave the equivalent of a lecture on what the different terms mean. In smaller startups that I’ve been a part of, we held equity tech talks and guest panels that included both investors and lawyers who could help employees understand the nuances of it.

Why go through all of this trouble? There are a number of reasons. Having a team that feels personally and collectively invested in building a valuable company can be very advantageous to the company’s day-to-day operations and long-term growth. It helps inspire accountability and collaboration during the smooth parts of the company’s journey, not to mention camaraderie and resiliency during the twisting and bumpy roads that the startup will inevitably navigate.

The value of explaining equity to employees extends beyond inspiring collaboration, though. It also shows that you value your employees enough to give them a piece of the upside of an exit. This commitment to your team members is reinforced when you show them that it’s worth taking time out of the daily startup grind to help employees understand what you’ve offered them.

A mentor of mine says, “If you want to know what someone values, look at where they spend their time.” Investing time in your employees’ career growth and financial literacy will help ensure that employees continue to invest their time in your company.

The more that companies do this here in Chicago, the more experienced talent we’ll see stay. And the more experienced talent that stays and benefits from successful company exits, the more companies they will launch here. And if we get those two pieces right, Chicago’s ecosystem will grow as more and more outside talent sees the Windy City as a place where they can flourish.

Originally featured in Chicago Inno.