Giving employees a slice of equity is a powerful tool for startup and scale-up investors. Implementing employee equity schemes helps portfolio companies attract and retain top-tier talent, encourage engagement and productivity, and foster a “one team, one dream” culture where employees are mission-driven, committed to growth, and dedicated to the part they need to play to achieve it.

However, employee equity schemes will incur dilution for you as an investor, so whilst the ROI is more than worthwhile in many cases, it’s important to ensure that portfolio companies implement a strategic, sustainable, and scalable scheme to see the best return.

To shed light on the importance of employee equity and the challenges portfolio companies often face along the way, we interviewed four forward-thinking people and talent partners working at major VCs. In this blog post, we’ll dive into their insights from the significance of equity, common questions, and where equity should take centre stage in a portfolio company’s journey.

🗣️ As an investor, why do you care about equity?

Asha Mistry and Mia Wähälä from Lakestar Advisors shared that “equity is much more than a symbolic carrot for sharing future success. It helps align long-term employer and employee incentives and offers a magic chance for all non-founders to access wealth creation in a timeframe that wouldn’t be possible with the constraints of a normal salaried position”. They added that “equity is a structurally equal and equitable opportunity to reward those who gave their time to building your success. But, this is not to be confused with equality of outcome; equity cannot be seen as a way to standardise, unify, or level individual compensation.”

Liz Broderick from Kindred Capital believes that “startups will only be successful if they can attract and retain the best talent. Equity is a huge lever that attracts, rewards, and aligns talent for the long term.” Liz also raised a fantastic point about the broader startup ecosystem: “More operators experiencing scale and earning meaningful cash from equity creates a larger pool of people who could go on to start new companies, advise startups, ideate, or make investments themselves.”

Chloe Paramatti from EQT Ventures had a similar view: “Equity not only empowers individuals within their current companies but also equips them with the means to establish new companies in the future, further driving innovation within the ecosystem”.

🗣️ When do portfolio companies typically focus on equity? What are the most common questions you receive?

Asha Mistry and Mia Wähälä from Lakestar Advisors work with portfolio companies at various growth stages. With first-time founding teams, they find that “operational topics can easily slide to the back seat amid the excitement of building and selling. A sudden fundraise triggers them to increase their equity literacy and they don’t know where to start.” When companies start to expand, “challenges come up when hiring international staff with different philosophies and expectations about compensation, e.g. the classic example of Europe vs. US.”

During restructuring periods, “compensation revamps tend to create a lot of question marks around equity and how it should be implemented operationally - communicating changes internally is an emotionally charged exercise. At Lakestar, we also see a lot of questions arise at each funding round where they may need to adjust equity for the existing team whilst balancing new hire expectations.”

Liz Broderick from Kindred Capital focuses on early-stage investment: “It’s a continuous learning journey for the first few years. When we first invest (pre-seed/seed), Founders set up schemes for the first time and have wide-reaching questions: “How do we set up an options scheme? How do we navigate across geographies? How do we find equity benchmarks? What do we do with options pools and new fundraising? How do we discuss options and equity with the team? Then, they often need support reassessing their scheme during each fundraising round and when they need to attract heavy-hitting talent.”

Chloe Paramatti from EQT Ventures finds that portfolio companies tend to focus on equity at two key points in their journey: “The first happens when they grow from 10 to 20 people and need a more structured scheme that still leaves sufficient shares to reward and attract future talent. The second happens when they’re more mature and many employees have already vested their shares; there’s an increased interest in rolling out new incentive programs to maintain employee engagement and motivation.”

Chloe also pinpointed international benchmarking and communication as hot topics: “Most questions revolve around benchmarking and best practices, especially for companies with employees across multiple locations. Founders also need guidance on effectively communicating the value of equity to employees”.

🗣️ How do you approach employee equity during portfolio onboarding?

Asha Mistry and Mia Wähälä from Lakestar Advisors focus their support towards businesses headquartered in Europe to strengthen European tech sovereignty: “We notice that a lot of Europe-based talent lack a solid understanding of employee equity and don’t have the tools to negotiate well. We’re keen to change this, so we give Founders access to expertise early in their growth journey by collaborating with - you guessed it - folks like EquityPeople. We also find peer-to-peer exchange very powerful, so we often link our Founders with others at a similar point in their journey. We also understand the importance of industry benchmarks, so we advise Founders to align their equity model with their culture and values. An employee with equity is more likely to have increased loyalty and a personal vested interest in the company’s success.”

Liz Broderick from Kindred Capital also highlighted the importance of sharing knowledge: “We initially share resources like guides and benchmarking tools with Founders, and then encourage them to connect with one of our People & Talent advisers to discuss their specific needs. We also have a community of People Leaders who share their challenges and experiences with one another and are supported by experts in the ecosystem.”

Chloe Paramatti from EQT Ventures shared that equity literacy is often assessed before investing, so they trust that portfolio companies understand the importance of employee equity and know where to turn for support should they need it.

🗣️ What’s one thing you wish portfolio companies knew about employee equity?

Asha Mistry and Mia Wähälä from Lakestar Advisors offered some advice: “To all you brilliant Founders out there, start building an equity plan sooner rather than later, and don’t be afraid to ask for help. Lean on investors and experts to gradually bridge your knowledge gaps so you can use equity as a toolkit that’ll help you build your team.”

Liz Broderick from Kindred Capital wishes portfolio companies knew: “Generally, your employees don’t understand your equity scheme! Specifically, they often misunderstand the difference between equity and options, how the mechanisms work, and the long-term potential value.”

Chloe Paramatti from EQT Ventures shared similar advice to Asha and Mia: “While employee equity schemes might seem intimidating to tackle when you’re small, do it earlier rather than waiting too long.”

Conclusion:

So, there you have it! The insights from these talent and people experts clearly emphasise the pivotal role that employee equity plays in a startup’s journey to success. Whilst it can seem daunting at first, employee equity is best tackled sooner rather than later, so it’s crucial to encourage your portfolio companies to build strategic, sustainable, and scalable schemes by giving them the tools, resources, and expert guidance they need to do so.

As they grow, give your portfolio companies ongoing support, particularly at checkpoints like international expansion, compensation restructuring, and new fundraising. As an investor, it’s never been more important to get the biggest bang for your buck and reap the best ROI from the dilution that employee equity schemes incur. So, don’t be afraid to ask an expert for help if you or your portfolio companies need it.