Most startup teams are well-versed in equity compensation, namely stock options that vest over time.  Stock options are a great tool to allow smaller or younger companies to compete for talent against larger, more mature, and deep-pocketed competitors. Is there a way, however, to take equity compensation a step further? At Liquid Stock, we believe ownership and liquidity are critical to a strong recruitment and retention program which is supported by investors’ views and research. Offering these benefits can help differentiate your company’s brand, assist in recruiting, and help keep employees engaged. 

Let liquidity be your company’s key differentiator

Stock options are often perceived by employees as a compensation structure, while shares are viewed as tangible company ownership. Offering employees the opportunity to own (in part) the company’s success drives further work engagement and motivation to go above and beyond to increase the company’s value. 

For recruiting, stock options are often viewed as just another part of a job offer. They are sometimes negotiated, often not, but generally expected when seeking employment at a startup. However, there are a couple of things that companies should consider that could make a difference in whether the recruiting process of a key new hire is successful. 

If the prospective hire still has vested yet unexercised options at their current employer, offering them a way to exercise those options may help them make their final decision. Liquid Stock transacts with option-holders to provide the funds they need to exercise vested options (exercise costs plus current and future taxes) while still maintaining ownership of the shares.

In a similar vein, a prospective employee may have already exercised options at their current employer but now is financially stretched. Under these circumstances, offering them the opportunity to early exercise their options may seem like an enticement but may fall flat if the prospective employee doesn’t have the financial ability to do so. Using a Liquid Stock private share liquidity transaction with their current shares could allow them to raise cash and take advantage of an early option exercise opportunity without added financial stress.

Drive productivity and success with better access to liquidity 

Once a startup has hired the rockstar employees that it needs, there are still benefits related to liquidity and ownership that can be offered to help keep them engaged. Offering periodic liquidity to employees can go a long way to keep everyone focused on the mission and to help mitigate financial stress and distractions. This is usually achieved in one of two ways: through a tender offer or a share ownership program. 

Tender Offers

  • Generally, tax inefficient, particularly with regard to stock options, or shares that have not been held over one year. (See our recent blog for more information).
  • Sometimes not possible due to a company having a depressed valuation or because lining up investors to purchase employee shares has suddenly become much more difficult.
  • Can create misalignment between a company and its employees as these offerings generally encourage employees to “sell at the top.” Meaning, employees would need to essentially bet against the future success of the company, and hope that when they sell their shares, the company valuation does not increase afterwards.

Share Ownership Programs

  • Allow more consistent timing rather than only when investor interest is high or the company’s valuation is increasing.
  • There is no specific valuation or share sale when participating in a transaction and hence no price discovery, thus internal valuations should potentially be unaffected.
  • Employees don’t have to regret selling at a discount or ahead of a subsequent financing at a higher valuation.

Despite the differences, the end result is similar: employees remain incentivized to continue working to increase the value of their shares. Offering periodic liquidity and share ownership to a wide swath of employees can be a powerful retention tool and can help crystallize a company’s culture. Simply put, option holders become owners and shareholders do not become sellers.

At Liquid Stock, we support liquidity and ownership as benefits for employees that allow them to exercise options early and optimize taxes, which many times is viewed as something only available to the C-suite. Doing so can go a long way toward having a motivated employee base that is all pulling in the same direction to increase a company’s value. Once this challenge is overcome, recruiting and retention can become sources of strength for a company’s brand and reputation.

This blog post is intended for general informational and education purposes only.  Liquid Capital Management, LLC (together with its affiliates, “Liquid Stock”) makes no representations as to the accuracy of information in this post, and no representations or guarantees as to specific outcomes from relying on this post. No content in this post is intended or should be construed as tax, investment, legal or accounting advice by Liquid Stock, or as an offer to sell or solicitation of interest to purchase any securities offered by Liquid Stock. Liquid Stock does not provide tax or other financial, legal or regulatory advice to its transaction counterparties. Always consult with your investment, tax, and legal advisors before making important financial decisions. The terms of any Liquid Stock transaction may vary. Outcomes (including financial and tax outcomes) of any transaction will depend on factors including the timing and value of any liquidity event.  While reasonable steps have been taken to ensure that the information herein is accurate and up to date, no liability can be accepted for any errors or omissions. All views and information contained herein are as of the date hereof and subject to change. Information contained in third-party links has not been independently verified by Liquid Stock and inclusion of such links should not be interpreted as an endorsement or confirmation of the content therein. Prospective investors considering an investment in a Liquid Stock fund should not consider this content as fund marketing material.