The secret to a successful options scheme is...communication. Let's begin with a few hard truths:
You may as well not bother setting up an options scheme unless you can clearly explain the scheme and its value to prospective and current employees.
Communicating your options scheme well to prospective employees could well feel at least as challenging as investor pitching.
I’ve previously written a TPF article about the technical side of setting up an options scheme and in this article, I’m sharing my thoughts on how best to communicate your scheme. I’m also sharing some materials I’ve used in the past.
Your options scheme is a powerful tool for hiring and retention only if it’s communicated well
You should think of your options scheme as a powerful tool to help you attract and retain talent (as well as a mechanism to help motivate your team with a collective drive towards success). It'll also help with competing in the job market against higher corporate job salaries.
Communicating your options scheme to prospective employees and existing employees are two different things altogether. Explaining an options scheme to prospective employees should be an engaging but open and honest sales pitch. However, explaining the same scheme to current employees needs to be a detailed job that makes it very clear how things work.
Failing to sell well enough to prospective employees reduces the value of your scheme in terms of attracting employees. Similarly, failing to communicate how your scheme works to existing employees reduces the scheme’s value from a retention perspective.
Don’t reduce the power of your options scheme by failing to communicate well.
So how should you make sure you’re well set to communicate to prospective employees?
When you’re hiring, the best candidates will likely want you to explain what their options will mean to them and you need to be able to do that with ease. In doing so you may find yourself answering tough questions about your business’ objectives, revisiting ground covered in your investor pitch, and going a step further to talk about your own personal motivations.
A good starting place is to get into the heads of your prospective employees; what are they thinking about when evaluating the value of the options you’re offering?
The first and most obvious question they’re likely to ask is how much the options are worth. Unfortunately the simple way of answering that question - "it'll be valued at the share price of our last raise" - is unlikely to be a compelling answer and it’s not the answer you should be giving. Any other answer will end up taking you down the path of speculating on the exit value of your company, which you won't want to do.
Here’s where you’ll likely have to revisit that investor pitch.
TOP TIP: Whilst explaining why you’re going to be a winner in your market, you should talk about the size of your market and the portion of that market you will address. You should see this as an amazing opportunity to sell your business and to test whether you can get the candidate onboard with your vision.
As well as wanting to understand what their options are worth the candidate will very likely ask you to help them understand when their options will be worth something. This question will have you talking about your exit strategy; a question that you probably haven’t covered in your investor pitching. No doubt that you’ll have some pretty well-formed thoughts on this and, before you speak with prospective employees, make sure that you’ve thought about how you want to share those thoughts.
TOP TIP: Prepare for the options chat with a prospective employee in the same way you would an investor pitch. The goal is to use a combination of data, vision, and personal passion to get them onboard. Paint a picture with a beginning, middle and end.
And how should you communicate to current employees?
I’m too often surprised about how little the average startup employee understands about their company’s options scheme. Employees who don’t understand their options schemes tend to end up thinking about their options in increasingly tenuous terms. Letting your team get to that point means that you’ve lost the power of your scheme as a retention tool.
Most important in maintaining engagement with your scheme is making sure that the terms of it are clearly communicated, and that those terms are well understood.
There are concepts within an options scheme that may well be complicated to your employees - the tax considerations, the cliff and vesting schedules, acceleration, exercise rules, leaver provisions - and communicating these concepts well means that your team understands the principles and how they’re applied within your scheme. Otherwise, you could end up with undesirable water-cooler chats along the lines of ‘I don’t care about my options, I’ll probably get screwed as a bad leaver anyway’, or ‘I won’t be able to afford to exercise my options anyway’.
You should make sure that you start communicating about your scheme with your employees as soon as possible. At Forward Partners we talk about our incentives scheme with prospective employees as part of the recruitment process and people are asked to contact me if they have any questions they want to be answered.
TOP TIP: We talk about our scheme again within our onboarding processes, we provide new joiners with a deck outlining how things work and I typically have a meeting with the new joiner in the first few weeks of their employment to take them through the content and answer any questions. If you have a senior ops or finance person in your business ask them to do this. If you don’t you should be doing it yourself.
The deck that you share with your employees about your scheme will be unique to your scheme’s terms but I’ve attached a template using standard terms which is similar to ones I’ve used before.
TOP TIP: At least once a year we schedule a lunch ‘n learn session inviting the whole team as a refresher about the scheme, and it's a useful interative way to re-engage the team and refresh their memories.
Alongside our deck explaining the terms of our scheme, I’ve created a calculator that allows the team to plug in assumptions and get an indication of what their return might look like. If you can build a model for your team then you should.
Your options scheme is an incredibly powerful tool, don’t limit its value by failing to communicate well.
Be prepared for some tough questions about your scheme as part of your recruitment process
Make sure you keep your team well-motivated by your scheme by aiding their understanding
I hope this article has been useful and good luck building your rocket ship with a highly motivated team who are vested in your mission.
My previous article about the technical side of setting up an options scheme
Seedlegals’ article on options schemes from a recent Sifted article