Options for Rewarding your startup team
You want to reward your startup team for all the excellent work they do; that's amazing! But what are your options? Bonuses, salary increases, giving them equity, or how about share options... Let's have a look at what's the right approach for you.
I'll start by saying, you don't need to stick to only one approach. We at Jexo often apply many of these rewards. And we are happy to do it because we believe that none of our successes would be possible without the team. Simple!
Let's see under what conditions you should offer each type of reward.
Startup Reward #1: Salary Increase
Why you should give a salary increase?
You offer salary increases for a couple of reasons:
- reward achievements,
- professional growth,
- change in role and responsibilities,
- adjust a previous lower salary entry.
When to give salary increase?
Salary review and adjustment intervals can vary from team to team. You can do ad-hoc salary increases when your early team joined at lower expectations due to our startup bootstrapped beginnings. As you start growing you can adjust everyone's salaries. Moving forward, you should aim for at least an annual review.
However, don't limit yourself by setting a fixed date. If another significant achievement comes along, don't wait until the next date to reward the team.
How to give a salary increase?
The first step to establish a salary adjustment is by researching the role averages and trends, evaluating the individual's performance and contribution over the previous period, and understanding their situation and financial needs.
Startup Reward #2: Bonuses
Why you should give bonuses?
Bonuses are usually issued to reward exceptional behavior, a sudden change in role or responsibilities, a fixed period (Christmas bonus), or a big company event like winning a big client, going public, etc.
When you should give bonuses?
As for when to give out bonuses, it depends on culture... Some companies have a no bonus policy because they fear that that will promote the wrong mindset. At Jexo, we think differently. We hire people with the right midset that are with us for the right reasons. And this makes it a lot more comfortable giving out ad-hoc bonuses and recognizing and rewarding individuals publicly.
For example, every month, we give out exceptional behavior bounties and run frequent hackathons with monetary prizes.
How you should give bonuses?
When it comes to how much money you should give as a bonus, well, there's no standard to follow. For both monthly bounties and hackathons, the rewards are usually enough to get yourself some nice gifts. Say, for example, a new set of headphones, a new lego set, and so on.
Startup Reward #3: Equity
Why you should give your employees equity?
The only time you'd issue direct and significant equity to your team is if they're part of the initial founding team (the initial catalyst phase).
What do I mean by founding team? You might not have the resources to hire a team at the very start, and you might have a few motivated folks that are eager to help. You can reward your initial founding team with equity knowing they'll play a more significant part in the long run.
How to give your employees equity?
To issue equity fairly, you should start by looking at each team member's contribution, time spent, effort, and value brought to the table.
Startup Reward #4: Startup Share Options
What are share options?
A Share Option is a benefit, the option given by a company to an employee to buy a share in the company at a discount or a stated fixed price.
Think about it as rather than giving you shares in my company, I'm making you a promise. It is a legally binding commitment that I will provide you a fixed number of shares to buy at a discounted price and sell for a profit at a specific point.
This specific point could be time-bound, but most commonly, it is bound to an exit event. For example, when the company goes public or gets sold.
Why issue share options?
Essential point: DO NOT create a share options scheme if you don't believe you'll ever sell or go public. It is entirely okay and normal for you to grow 100+ years of lucrative business as a private entity. But if that's the case, what is the point of offering options that will never convert? You're better of rewarding work with some of the options mentioned earlier. But if you're open to exit events, then continue reading...
Types of share options in the UK
There are a few types of Share Options, but because I deal with the UK, I'll talk about two of the most common ones over here: EMI and Unapproved Share Options.
An EMI or Enterprise Management Incentive is a government‑backed, tax-advantageous share options scheme. It is mainly used by small to mid-sized UK businesses looking to share their successes with their team as their company grows.
If you're a UK-based startup and your team works in the UK then this might be the right plan for you due to the taxation benefits for both your company and the team. But depending on how you look at it there could be a downside: You have to use the Company House valuation standard to establish what the share options are worth. And this could hide certain realities.
Unapproved options are flexible and can be given to employees, contractors, advisors, etc. These options don't require any formal valuation. But there's no tax benefit for the recipient, who is liable for Income Tax on the difference between the exercise price and the market value of the shares at the time they are exercised.
How to issue share options for your startup team?
The scary part with share options and one of the main reasons early founders don't look at it is the legal and paperwork overhead. But there are ways to go about it and there are options available here in the UK to issue an options scheme for your team:
#1 Hiring a corporate lawyer
First, the traditional way: hiring a corporate lawyer that can set up everything for you. They usually cost about £5000 in fees for the initial setup. Then, with every year's adjustments, you'd pay a fee. They're potentially cheaper lawyers, but this is the quote I've been getting.
#2 EMI or options specialized legal services
That leads me to the second option: EMI or options specialized legal services. This approach is usually cheaper, around £2000-£2500 and additional yearly fees for amendments.
#3 Vestd platform
Vestd is a service that allows you to issue and manage share options with ease and without all the legal headaches. You choose the type of options, add the valuation, create your requirements, like when options should convert and allocate options to the team.
The legal contracts and paperwork is issued by Vestd and even submitted automatically to Companies House for you. And the coolest part is that your team can log into the platform and see dashboards with real-time valuation and their share options worth.
Currently, Vestd is only for UK companies, give them a try if you're in the UK and looking for a headache-free way to reward your team.
How much you should allocate for share options?
What percentage of your company should you give away to your team under the shape of options? Well, it depends on two factors:
- How much is your company worth today
- How much will your company be worth at exit
Suppose your company is valued today a bucket of money, or you predict it will be at the exit event. In that case, it makes sense you give out a lower percentage. The opposite is true as well; give out more shares if the value is lower.
The vital question to ask yourself when deciding is this: When I sell or go public, will the financial gains provided to the team have an overwhelmingly positive impact on their lives? If the answer is yes, then you're on the right track.
How much are the share options worth?
I mentioned how much your company is valued today. But how do you know how much is your company valued? Here in the UK, if you want to give EMI shares to UK-based employees, there is only one way: Submitting to Company House for valuation. This approach usually considers very basic calculations like profit & loss, assets, revenue, and so on. The problem with this approach is that your company will be worthless if you're post-seed investment or you're not yet making revenue.
But if you don't go EMI but you decide to go with Unapproved options, you're free to value the way you see fit. There are plenty of models out there. For example, we are a Software as a Service company, and we use the Private SaaS Company Valuation Multiples.
Why it's better to go with Unapproved options for Saas Startups?
The Saas valuation formula has at the base our Anual Recurring Revenue which gets multiplied by the standard 12 times that private SaaS companies get valued at. You can deduct 20% to include market risks. For example, if you're reliant on a marketplace to exist.
We at Jexo choose this formula because is simple to memorize and helps our team visualize how much their shares are worth with ease. Let me explain: every month we have a team get-together where we discuss Jexo's growth with the team and share a variety of key metrics. One of these metrics is MRR, Monthly Recurring Revenue. When we talk about MRR growth, we also mention what influenced the number that month. So is easy for each team member to calculate and figure out how their contribution has affected the value of their share options this month.
And that's the whole point! Suppose your company valuation is complex and no one understands. In that case, people cannot get behind it or figure out how their contribution affects the final number. Want motivated teams that feel empowered? Show them exactly how their work impacts the bottom line.
How many share options to issue each member
So now you're all enlightened and ready to issue some proper share options. But how much does each team member get? You can set up rules case by case, here are the three most common ones:
- If you brought your team in at a lower salary range due to being bootstrapped, then share options are an excellent way to level things up. Look up the standard or high-end salary for each role, and give each member options that reflect the difference between their current salary and the industry standard. The one-year salary difference, that is.
- The second recommendation is that you give them a percentage of their yearly salary in options. With this approach, you give out 50% – 90% to medium level and 25% – 50% to junior staff members.
- We at Jexo actually use this third approach. We value tenure above seniority. Because it shows dedication, and we want folks to be with us for the long run. So the longer you're with us, the more rewarded you'll be. Seniority is a factor as well, but the predominant one is tenure.