Entrepreneurs excel at many things: Coming up with innovations and inventions, making it rain with investors, and building strong core teams who believe in the product or service. Nevertheless, they’re not always the best at tracking private equity or understanding their ownership.
There’s a simple reason for this, of course. It’s because entrepreneurs are busier than bees. Plus, many first-time startup owners don’t have a background in issuing stock options for employees and understanding how the next round of financing can impact their dilution. As a result, many don’t even think about the nitty-gritty until problems hit them square in the face, generally when there isn’t much time. Instead, they’re worried about keeping their “babies” afloat long enough to gain traction.
Of course, this can’t go on forever. But, sooner or later, CEOs and founders have to face the music when it comes to managing their equity. And the earlier they get a system on track, the better. Like anything else, the best place to begin is by getting a broader understanding of the modern corporate ownership model.
How Equity Happened in the First Place
Though it might seem like corporate equity has been around forever, it’s a relatively new concept on a big scale. Certainly, investors have always formed business partnerships. But employee stock options and profit-sharing plans are surprisingly contemporary ideas.
As explained in The New York Times, Sears launched the notion of employee profit-sharing in 1916. Here’s how the process worked: Sears released five percent of its yearly net earnings. That five percent was divided among Sears workers who wanted to enter into a profit-sharing plan. Then, they added five percent of their earnings to the pot and earned stock as their reward. In time, the Sears profit-sharing plan became so popular that nearly every Sears employee took advantage of it.
Over time, profit-sharing and stock options became more sophisticated, of course. Nevertheless, the basic premise of divvying up equity remained the same. Now, many startups rely on giving out equity in exchange for upfront investments. Watch one episode of “Shark Tank,” and you’ll get the gist fast of why it’s so attractive. Just exchange cash for stock and, voila! You have a business with some capital and the ability to get up and running.
It all sounds so simple. But, alas, it’s not. Handing out equity is a far cry from handing out pieces of candy. It can get complicated rapidly, especially for untested entrepreneurs. And that’s where problems can start taking on monumental proportions.
When Tracking Equity Becomes Sticky
What are some of the most significant equity tracking and handling challenges confronting business owners? A huge one is the failure to ensure all ownership rights are recorded. All stakeholders need to be on the same page when it comes to giving out equity and having access to review their holdings. Future funding rounds can impact everyone. Without access to modeling tools that have been reviewed, decisions can be made recklessly.
Another issue involves managing equity in a growing business and having no formal process to keep everything straight. Excel and Google spreadsheets may seem like a natural fit. They can certainly help to keep everything organized at the offset. However, they’re not meant to be long-term equity tracking solutions. That’s not their purpose. Additionally, as CEO Today reports, Google spreadsheets aren’t as secure as they purport to be. Who wants a data breach of investors’ information?
Of course, there are some other equity management roadblocks beyond diluting ownership and keeping everything in order. Roadblocks include not working with a financial advisor on a 409A valuation — and timing employee stock option issuances incorrectly. Oh, and it’s important to mention that failing to keep up with vesting schedules and terminated employees can lead to serious headaches.
So, does that mean that you’re out of luck when it comes to offering up equity? Should you throw in the towel and not worry about profit sharing, stock options, or the like? Not at all. As a savvy entrepreneur, you can bypass even the most overwhelming complexities. And you can do it more quickly than you might assume.
Tips to Streamline Ownership Tracking
Remember that managing your company’s equity takes some effort. You can expect to spend a bit of time setting up everything. Below are a few best practices to implement on your journey to becoming an equity tracking expert.
1. Find a Solid Software Program
First thing’s first: Stop using hand-created spreadsheets to keep your equity in order. You’re bound to miss something, and it could be something essential. For instance, can you be sure that you’ve inputted everything accurately? Are your calculations accurate? How simple is it to retrieve documents and reports when you need them?
Make being an executive a breeze by investing in a solid equity plan management system. Find one that’s pre-built, especially for companies of your size. At the same time, look for a system that can grow with you. The last thing you want is to purchase software to manage your equity information, only to go through the process again next year. If you’re expecting to scale up in the coming months or years, find a software program that will come along for the ride.
2. Keep Remote Workers’ Needs in Mind
Are you planning to open up your equity options to employees? Excellent. You’ll be trodding in the footsteps of companies like Sears, as mentioned above, and even Google. Here’s something to consider, though: You may have remote workers on the payroll. That’s important to think about, especially if they’re going to be offered equity. After all, they’ll want to be able to track their options effortlessly.
According to stock plan management company Astrella, providing unfettered accessibility for virtual workers is key. As noted in one of the brand’s published pieces, “…it’s important that employees can exercise their stock options from anywhere in the world. Employees need to be able to access the software from whatever country they are in, and to exercise their stock option using their native currency through whichever processor is available to them.” Consequently, your job isn’t just to give them a chance at equity but a streamlined way to see how well their options are performing.
3. Educate Employees on Their Stock Options
Transparency and fairness are significant selling points right now for all companies. Employees like to feel like they’re getting honesty from the C-suite. They also want to be kept in the know about what’s happening with their equity investment dollars. Yet, many have never had a deep understanding of equity. Others may be confused about how they can make equity in your (their) company work for them.
The answer to filling this knowledge gap falls squarely on your shoulders: training — and tons of training. Not only will educating your employees on stock options and other equity choices help them, but it will help your company. You’ll be doing everyone on your team a huge favor. Be sure that your training includes a discussion about taxes. Employees may not realize how their profit-sharing or stock options are taxed.
4. Evaluate Equity Tracking Needs Regularly
As with so many other systems, workflows, and processes, you can’t afford to take a “set it and forget it” attitude toward equity tracking. This is something you need to revisit regularly. Ideally, set aside time quarterly or at least semi-annually to evaluate your current procedures and tools. Are they still working for you? Do you notice any problems? What does your team say?
You may want to get advice from financial and investment advisors periodically as well. If you end up merging with another company, be sure to notice how your decisions affect equity arrangements. Like a physical body, your company runs as if it’s a system. Therefore, what happens in one area is bound to affect elsewhere, such as on your equity.
5. Continue to Offer Other Benefits
The Great Resignation is upon us. As mentioned in Harvard Business Review, some sectors are seeing employees flee at a rate of 30%. Nevertheless, you can hold onto your best people by continuing to offer benefits beyond equity in your company. After all, equity is a fantastic perk, but it can’t take the place of other benefits like health insurance and scheduling flexibility.
The bottom line is that stock options and other equity offerings need to be viewed as one carrot among many. Some of your workers won’t take advantage of equity right away. They’ll wait for a while, even after they are eligible to enter into profit-sharing or purchase stock shares. As part of your equity management, you may want to include a list of workers who haven’t taken the plunge. You could occasionally remind them of their eligibility, as well as their eligibility to enjoy other benefits your brand provides.
Tracking equity doesn’t have to be an arduous experience. Even if you’ve never launched a business before, you can master equity management. All it takes is a bit of practice, the right tech tools, and a plan.