Skip to main content

How to Navigate Equity Compensation Growing Pains

Let’s start with the basics. What is equity compensation?

Equity compensation is providing equity awards or grants of a company’s stock as part of an employee’s compensation. There are a variety of reasons why a company may choose to offer equity as part of a total compensation package. Here are a few:

  1. Attract and retain key talent
  2. Balance out compensation to lower base salary at cash-strapped startups
  3. Motivate and incentivize work performance 
  4. Align the interests of the workforce to those of shareholders, essentially creating a culture of ownership

Granting equity-based compensation can be complex. Many of the decisions a private company makes regarding their stock plan are related to their revenue, the number of shareholders they have or plan to have, whether they are global and whether they are planning to take their company public.

So, how can Shareworks by Morgan Stanley help companies plan equity and execute compensation through growth?

At Early-Stage Private Companies

Startups or early-stage private companies might start their cap table on a spreadsheet and typically offer stock options as equity compensation. Given the fact that a stock option is a right given to the employee to purchase stock at a fixed price, there are some challenges in managing equity compensation at startups:

  • Vesting schedules get complex quickly, typically when there are more than 10 people on the cap table
  • Cap table management on a spreadsheet is hard to upkeep and lacks a single source of truth
  • Some early-stage companies turn to legal professionals to manage their equity compensation plans which may be very costly

While many startups choose to manage their equity plans on spreadsheets, we believe there’s a better solution. Spreadsheets are messy, prone to human error and come with tedious version control—managing a cap table shouldn’t be a headache.

At Growth-Stage Private Companies

As companies enter their growth-stage, they are in hyper-scale mode. They’re looking at expanding product offerings, reaching out to new audiences and maybe even going global. With all the growth, there are bound to be growing pains. Most companies start to notice growing pains when they being to expand their workforce.

As these companies hire key talent, they face a competitive job market and demanding compensation expectations. Equity as compensation is a tool companies use to their advantage by incentivizing top talent with the promise of ownership. It is also valuable to help retain the original talent that helped build the company. But there comes a time when growing companies ask how much is too much? See how Shareworks can help you complete a compensation strategy with industry benchmarks and competitive data.

What are some pains companies may encounter at this phase of growth?

  • Additional funding rounds have made managing the cap table more and more complicated
  • Terminations have become harder to manage
  • Stock options are now vested and employees are making the transition to shareholders
  • Finance teams are spending time managing compliance, regulations and taxes
  • There may be employee stock plan participants all over the world, making it harder to communicate the logistics of their equity and more importantly, the value it holds

How can companies address these growing pains? Discover how Shareworks can help improve communication, create a culture of ownership and unburden finance teams.

At Late-Stage Private Companies

At a mature private company, the goals and challenges are completely different from the earlier days. Equity plans are more complicated, there are more regulations to watch out for and tax or legal compliance has never been more complex. Check out the Shareworks resources for tax and legal information relating to global equity plans.

Late-stage companies are typically looking to the future whether that involves being a thriving private enterprise or finding a pathway to the public market. Others are looking for ways to reward shareholders with a liquidity event, such as a tender offer.

What are some pains companies may encounter at this phase of growth?

  • Managing increasing complex equity plan structures
  • Offering liquidity to shareholders
  • Retaining talent and evolving equity compensation plans
  • Making sure all financial reporting is audit-ready

How can Shareworks can help ease the growing pains when a company may be feeling them the most?

  • Maximize efficiency and accuracy with data integrations: Leverage automated data integrations of both employee demographic and payroll year-to-date contributions between HRIS systems and Shareworks. 

  • Increase plan participation by leveraging a stakeholder portal: Many employees at private companies are new to receiving equity at a company, and may not fully understand the value of their equity or when they can act upon their equity awards. Shareworks Participant Experience allows for any stakeholder to view the total value of their equity, pay for exercising shares and/or any potential settlement of taxes through ACH and view securities they held with digital certificates.   

  • Reward early investors and long-term employees with liquidity: Equity held by shareholders at private companies are typically restricted from sale. If a company doesn’t plan on becoming public anytime soon, there may be pressures from early investors or early employees to cash out. With Shareworks, companies can facilitate a liquidity event, such as a company buyback of shares or a tender offer, all on the same platform. Companies can identify eligible participants, allow participants to elect and sell shares through the portal and update the cap table all in one seamless process.

  • Plan for growth with a scalable equity plan solution: While many private companies begin small, aspirations for growth can come in many forms. If growth means increasing employee base, a platform that is built for handling inputs of large amounts of data while still maintaining rapid updates and reporting is necessary. If growth means expanding internationally, a platform that supports multiple currencies, languages, exchanges and provides a high level of data security is essential. If growth means expanding plans to offer new types of equity instruments, a platform needs to be able to support tracking vesting, transactions, settlements and accounting. Finally, if growth means transitioning to a publicly traded company in the near or long-term future, choosing a single platform that fully supports a company today as private, and tomorrow as public is vital. Shareworks can provide a seamless experience for companies, their teams,  executives and plan participants.

The lifecycle of private companies come with ups and downs, peaks and valley, but managing equity compensation plan doesn’t have to be a burden. Shareworks by Morgan Stanley has the tools to support companies through every stage of growth, from Startup to IPO and beyond. If you’re interested, set up a time with a solutions specialist for one to one guidance on how to solve your private equity compensation plan growing pains.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters.

Shareworks by Morgan Stanley services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.

CRC 3113181 (06/2021)