A contribution by Robert Moewes. He is Head of Germany at Optio Incentives. The Norwegian company helps young and listed companies to set up and manage employee participation programs.
Recruiting talented employees and keeping them long-term – this is crucial for the success of startups. one Analysis by the consulting firm Deloitte according to low salaries are one of the most common reasons why employees quickly leave a company. And the cost of filling a vacancy is significant. A company with fewer than 100 employees loses an average of 13,700 euros for every unwanted fluctuation. Money that startups usually don’t have. Especially now, when many are forced to save due to the economic situation.
Many startups therefore use employee participation programs (ESOP/VSOP) to retain talent even in times of crisis. In this way, employees receive shares in the company that can be worth significantly more when sold a few years later. The empiricism confirms the procedure: According to a study by the Rutgers School of Management and Labor Relations (SMLR) the number of voluntary redundancies falls by more than half if employees share in the company’s success.
But times have changed. Until a year ago, the ratings of many startups were always rising steeply Downrounds, mass layoffs and even bankruptcies to the reality of many companies. That makes participation programs for employees less attractive. So how do startups ensure they can continue to attract and retain talent?
1. Communicate ESOP change more carefully
Many startups that have recently closed or intend to complete a new round of funding may need to do so lower rating accept. For employees’ share options, this means that they are not only worth less than they were a few months ago, but may also fall below theirs Exercise price. So the bottom line is one Loss. This can be demotivating, especially for employees who have not been with the company for very long.
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Can help transparency: Employers should take the time to openly explain to their employees how the lower company valuation came about. Also should perspectives be shown when the situation is expected to change again and which ones Measures are necessary for this. The more transparent the company is, the easier it is to regain employee motivation. It should be noted that most employees do not interact with investors and do not have in-depth financial knowledge.
2. Adjust employee participation program
In addition to the consideration of explaining the lower valuation transparently, companies can changes or even consider completely new participation programs. This is particularly relevant when many employees’ options have fallen below their issue price. In order to make this more attractive again, the Exercise price be adjusted to the current rating. This has the advantage that the employees do not make a loss with their options.
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But be careful: such a measure can be controversial discussions entail, especially with investors, because they want to be treated preferentially. Experience has shown that only a few financiers will accept a loss in the value of their investment in favor of their employees. One Alternative would be, easy new options for employees issue at a lower valuation. However, this assumes that there are still enough free options in the allocation pool. If this is the case, such a “fresh start” can help to keep employees motivated.
3. Pay employees through secondaries
In the current economic environment with higher inflation and rising interest rates, many startups are shifting their operational focus from growth to profitability. Cash reserves (e.g. for salaries) can be effectively saved via participation programs. At the same time, however, there are also employees from higher cost of living and rising interest rates affected. In particular, employees who have been with the company for many years and whose options have increased significantly in value may want to sell their participation at a profit to cushion private costs.
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Here so-called Secondaries – i.e. the sale of options to investors or third parties – can be a tried and tested means. Startups can facilitate secondaries by creating a market for their equity options. This can be done by setting up a private exchange or by working with a company that manages employee share ownership.
4. Use good leaver clauses
Good communication or not: layoffs cannot always be avoided in times of crisis. To ensure that participation programs remain attractive for employees who are leaving, companies can set up so-called Good Leaver Clauses agree in the contracts.
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That means: If there is a operational termination, employees can retain all or part of their previously allocated share options. For example, even if the termination occurs within the first year of employment. Until then, most participation programs still have a blocking period, also known as a “cliff”. Some startups even allow employees to receive further share options even after their dismissal.
Such good leaver clauses can help startups to maintain their reputation as a good employer even in times of crisis. They also help maintain close relationships with ex-employees who may become valuable partners or customers in the future.