Written by and shared with permission of: Mighty Capital Partner, Jennifer Azapian
For in-demand skills, equity premiums could be as much as 150% higher than average.
Startups working with leading edge technology know that hiring for the most in-demand skills comes with a cost — not just in salary but also in equity grant amounts. The right insight makes reaching your funding goals easier.
The hottest skills now
It’s no secret that augmented reality (AR) is a hot investment area. Since the field is still new, AR experienced workers are hard to find. Not only do AR specialists get paid higher salaries, they also demand larger equity grants than the average software engineer. The latest data shows that AR equity grants at software companies average 152.7% higher in value than the standard grant for the same level job.
Computational linguistics and natural language processing are also highly sought-after skills since the advent of voice interaction platforms such as Siri and Alexa, as well as major gains in the use of chatbots and AI to enhance customer relations, sales, and shopping experiences. Critical to robotics and the self-driving car industry, computational vision is another premium skill in high demand. The skills with larger premiums follow business trends, and they reflect the future of the tech industry.
Equity difference malaise
Be aware that disparate employee stock grant size may cause friction (and potential liability) when it comes to pay parity. Say you have two employees, hired at the same time, working side-by-side on the same project. One night they go out for drinks, disclose what size grant they got, and find out there is a significant difference, even though they have the same amount of experience.
Since workers with “hot skills” may get a much larger equity offer, could this affect team morale – or even performance? A recent study showed that when pay differences at the same level in an organization are disclosed, it can measurably (negatively) affect performance. Even though the difference may be rationalized from a management perspective, it might seem unfair to individuals.
Communicate your company’s value and potential
Employees often focus on the number of shares or percent of options instead of the discount they are being offered for company stock, and future valuation potential. They might think, “So-and-so got 0.2%, and I only got 0.1%. I only got half as much.”
Instead, leadership must shift the conversation away from percentages and number of shares and drive home the importance of increasing share value for the future. And if your business is in a leading-edge technology or high-potential market vertical, that future value may be implied by an expected higher valuation and exit multiple.
When competing for hard to find talent, you may burn through your equity pool faster than anticipated. If your budget uses industry benchmarks for generalist software engineers instead of “hot skills” premiums, what you set aside for grants might be far below what the market demands.
“When competing for hard to find talent, you may burn through your equity pool faster than you anticipated.”
Also, consider that if an employee gets double the amount of equity compared to other hires, they essentially vest the same amount in half the time. Therefore, they might rationalize that they can leave the company sooner, exercise their shares and get a comparative benefit, rather than a perceived loss.
You may count on higher option grants to attract talent in high demand, but don’t solely count on new hire equity grants for retention. A mix of retention strategies should be considered, especially for premium skills groups. If your option pool is limited, consider less differentiation within each level in new hire grants, but greater differentiation in variable cash compensation and ongoing equity grants, based on demonstrated performance.
Ever evolving pool of skills
“Hot skills” come and go. As everyone rushes to learn the in-demand skill, the talent pool for that specialty grows, eventually diminishing the market value of the skill. Employees in many of the top 10 areas of expertise will find their premiums begin to shrink as these skills become more common. Companies should consider this when weighing long-term outlook and compensation. For example, if you still want to offer higher equity grants, you might be able to trim back on salary or other retention costs.
“The last thing investors like to hear — other than the fact you’re running out of cash — is that you’ve run out of equity due to insufficient budgeting and/or overspending.”
Investors may closely inspect option pools based on your headcount plan, and will review a startup’s budget according to the most current benchmarks. As I wrote in a prior article, the last thing investors like to hear — other than the fact you’re running out of cash — is that you’ve run out of equity due to insufficient budgeting and/or overspending. Boards and founders can be loath to restructuring cap tables and injecting additional dilution unexpectedly. It’s vital that startups plan accordingly.
Jennifer Azapian is a Partner at Mighty Capital and works actively to source, assess, and invest in deals and to support portfolio companies with their HR strategies. Since starting her career scaling Virgin America from 10 to over 2200 employees, she has spent the last 15 years working with growing businesses, their leaders, and investors as an executive coach and advisor on issues such as compensation, organizational design, headcount and performance strategic planning — all with an eye to helping companies prepare for smooth, rapid scale or for an exit. Jennifer holds a BA from Dartmouth College, an MBA from INSEAD, and Compensation Committee Certification from the Economic Research Institute.