Refreshing Equity Grants: Retain and Reward Top Talent
Best practices for structuring equity refresh grants to motivate and retain your team as vesting schedules end
DEAR STAGE 2: This is our fourth year in business and we are coming up on the end date to some of our early employee’s vesting schedules. We have a great team and want to make sure they are incentivized appropriately. How should we think about granting additional equity? ~EQUITY DILEMMA
DEAR EQUITY DILEMMA: This topic is coming up in A LOT of board rooms right now. Year end is often a time when companies reflect on employee performance, review annual bonuses and consider refresh grants.
My first piece of advice - don’t reinvent the wheel. Carta has the data and has done an incredible job outlining how other companies are handling refresh grants. Check out their post here.
For those of you who want the operator’s take, read on…
I called on a number of people leaders at various stages – Kristen Kenny, Zoe Silverman and Victoria Ashton. Those convos informed a couple of quick tips worth sharing.
TIP 1: Start by defining your compensation philosophy
It’s critical to start by defining your compensation philosophy. There is plenty of data out there in the world on what others do, but that doesn’t mean you have to abide by that advice. I work with a company that review comp 2x/year for every employee, and others who have decided to refresh equity grants will only be issued for top performers and only when the initial grant ends. There are no right or wrong answers here, but we do recommend that you leverage data to build out compensation and equity bands by department/role and have a process to review total comp packages on a regular cadence.
TIP 2: Then set a schedule for when each type of equity reviewed/granted.
As part of your compensation philosophy, you should have a strategy for equity grants, including how/when/why you make additional grants to existing employees. Here’s an example to get you started
New hire grant: award grants to new hires on their first day. This is generally the largest chunk of equity an employee will receive and the standard vesting schedule is a 4 year vest with 1 year cliff.
Retention/Refresh: evaluate all full-time employees *before* their new hire grant is fully vested. Most companies begin this evaluation 2-3 years into an employee’s tenure and begin making smaller retention grants. Most companies either decide to review refresh grants 1x/year during a review cycle or quarterly based on employee anniversary date.
Promotion: when an employee is promoted, you want to bring them up to the equity level of their new position. One way to do this is to look at their unvested equity and compare it to the band for the role they are being promoted into. Most companies then issue a grant to true up to the midpoint of the new band.
Performance Based: these are generally reviewed annually and used much more rarely. They are a great tool to engage your top performers (top 10%, *maybe* top 20%) and reward exemplary performance.
Tip 3: Be clear in your refresh grant strategy.
You might be wondering, what is the most common type of refresh grant? Boxcar has become more standard for early stage cos to ensure continuous vesting and avoid the “cliff” problem as the generally larger new hire grant completes vesting. Carta illustrates how these grants work - granted early/overlappy, but vesting consecutively:
IMAGE CREDIT: CARTA
Hopefully this helps you get underway with your planning process.
Until next week!