Last year was the most active year in the U.S. for IPOs — a staggering 402 companies went public. And 2021 isn’t showing any signs of slowing down. In fact, the pace of company exits is expected to accelerate.
It’s a defining and, potentially, lucrative moment for everyone that built the company. Yet, many startup employees don’t understand the intricacies of their stock options and how to make the most of their equity leading up to, and after, an IPO. In 2020 alone, startup employees left behind $4.9 billion by not exercising their pre-IPO stock options.
The number one reason? Surprisingly high costs due to unforeseen taxes. On average, it costs twice the annual household income of an average startup employee to exercise options at fast- growing companies. Unfortunately, it gets more expensive to exercise the more valuable a company becomes. It’s an outcome most employees don’t anticipate.
But given the recent IPO frenzy, startups and founders are going the extra mile to help employees understand their equity and avoid unnecessary costs.
Here’s why companies are educating their employees about their equity:
1 – An IPO inevitably raises equity questions from employees
The IPO market is hot. Really hot. Affirm, Coinbase, Roblox, UiPath and Coursera are just a few of the big names to exit this year. Robinhood, Instacart, Rivian Automotive, Better.com and NextDoor are also expected to go public in 2021. It’s not just Wall Street and VCs who are paying attention to the frenzy. So are employees.
Many startup employees start to zero in on their stock options once an IPO is in sight. Suddenly they have a lot of questions. What types of stock options do I have and what is the difference? What is the most recent company valuation? What are my options worth? What will it cost to exercise them? And what is the tax impact? Should I exercise now or wait until the IPO? The list goes on. These are important questions with nuanced answers that are unique to an individual’s personal situation.
Management teams want to help their employees prepare for this potentially life-changing financial decision, but they often don’t have the internal equity expertise or resources to service hundreds, or more, of employees that have specific questions about their personal equity situations.
That’s why they find value in bringing in outside experts to work directly with employees — both in large settings and in one-on-one sessions.
2 – Employees are starting to demand equity education from their company
If there is one thing startups are well known for, it’s the perks and benefits they offer. Ping pong tables and fridges full of soda in the office may be what people see on TV and, for better or worse, created some great satire. But the benefits startups offer have certainly changed what employees expect from their employer, beyond their salary.
Parental leave policies are now front and center on startup career pages. Years ago, that wasn’t the case. And look at the explosion of companies (mostly startups themselves) offering coaching and mental health services. Even Prince Harry just joined one.
Financial wellness benefits are next. Last year, Bank of America’s 2020 Workplace Benefits Report highlighted that employers and employees both believe in financial wellness. In fact, 8 out of 10 employers believe these types of benefits can create more loyal employees and increase productivity. And the Consumer Financial Protection Bureau recently noted that the pandemic has only accelerated the focus employers are placing on the financial health of their employees.
With IPOs heating up, employees are starting to realize that what they had hoped — their company going public — is now becoming a reality. The first place they’ll go to learn more? Their employer. Even back in 2019, 82% of employees said they wanted their employer to help them understand their equity compensation.
3 – Equity is complicated, but startups don’t have to go it alone
As Frederik Mijnhardt, Secfi’s CEO, recently said in the Q1 2021 Pitchbook-NVCA Venture Monitor Report, “we often speak with founders who are frustrated when employees don’t value the equity component of their compensation.” Setting up an equity program and maintaining a cap table is already hard enough. Helping every single employee understand their equity and how to navigate it? That’s complicated and time-consuming.
But founders don’t have to go it alone. If employees have questions about their healthcare, there’s often a third-party administrator they can contact. Most companies invite them in during open enrollment. Equity doesn’t have to be different.
Secfi works directly with founders and executive teams at pre-IPO startups (some of whom are now public) to provide equity education programs for their employees. We have a team of equity strategists that deeply understand the complexities of stock options so employees can better understand their personal situation — and get the financing they need to own their options.
Now is the time that founders and startups can get ahead of employee equity. As more employees start demanding answers about their stock options, offering equity compensation is only the beginning. And the companies that offer education and resources will see a more engaged workforce incentivized to make an IPO a reality.