Equity compensation is a complex but critical recruitment vehicle that tech companies use to attract talent. For private companies, many utilize equity more heavily to offset their cash spend.
Recently, the dynamic of equity has shifted as these tech companies are now having to compete against AI companies that are flush with cash, putting pressure on teams to more effectively use their equity to recruit and retain the best talent.
Ultimately, in today’s ever changing market, there continues to be more emphasis on re-evaluating how companies think about their equity compensation strategy. Below we highlight considerations to help you do this.
Know your Company and Culture
Familiarize yourself with your Company’s culture and philosophy, as that is generally the backbone of your compensation programs. Understand why your programs are designed the way they are and how they promote your Company’s values. For private companies in particular, the equity compensation programs are heavily influenced by the founder and leadership.
Understand the Market Trends
While most pre-IPO tech companies still adhere to traditional 4-year vesting schedules with a 1-year cliff, some alternative approaches have surfaced. It is helpful to understand these alternate practices but know that they are customized to fit that company's culture and their specifics. Therefore, what works for them may not work for your Company.
- One-year vesting schedules (e.g., Stripe, Lyft, Coinbase)
- Profit Participation Units (PPUs) offering a percentage of profits (e.g., OpenAI)
- Front-loaded vesting splits (e.g., Pinterest, DoorDash)
Navigating Equity Benchmarks
Unlike salary benchmarks, equity benchmarks can be challenging to obtain, especially for private companies. Factors complicating comparisons include:
- Equity types (options vs RSUs vs PPUs)
- Vesting schedules (traditional vs. unique)
- Valuation methods (preferred vs. 409A)
Platforms like Pave, Compa, Levels.fyi, Kamsa and Complete are emerging to provide more insights into market trends.
Recommendations for Talent Leaders
- Advocate for your Company by understanding what differentiates your compensation program from others.
- Collaborate closely with your Total Rewards team to discuss your programs and why it was designed the way it is.
- Stay informed about market trends by tracking competitive offer details and their impact on acceptance rates. Every candidate conversation is an opportunity to gather market intelligence.
- Build a network with other talent leaders to share insights.
- Follow leaders in the compensation space: Charlie Franklin (Compa), Matt Schulman (Pave), and Zuhayeer Musa (Levels.fyi).
- Be prepared to address valuation discrepancies: Candidates may discount company valuations by up to 25% in uncertain markets. Recognize the shift towards cash and recent market conditions have led candidates to value immediate cash compensation more highly.
- Educate yourself: Utilize resources like Carta's Equity 101 training to understand equity fundamentals.
By staying informed and adaptable, you and your teams can play an active role in navigating the changing landscape of equity compensation more effectively.
