5 Equity Compensation Strategies For Your Private Company

Identifying the right equity compensation strategies can help your company more effectively navigate the journey from startup to IPO and beyond. 

Equity-based compensation is often a powerful tool for private companies. It can help attract talent, incentivize performance, and align employees’ interests with long-term company success.  

Implementing equity compensation strategies that work for your business – and your talent – can be complex. Your equity compensation plan will likely change greatly as your company scales. 

Throughout my career, I’ve witnessed and worked with many private companies along their equity compensation paths. Fidelity Private Shares is here with you on this journey. Private companies trust our all-in-one equity management platform to handle the intricacies of business growth. We’ve also built a lively startup community to help support founders, operators, and investors. 

Our team recently hosted a webinar with Infinite Equity, “Evolving Your Equity Compensation Strategy: A Crash Course for Private Companies.” I was joined by Emily Cervino, Head of Industry Relationships and Thought Leadership at Fidelity, and Jon Burg, Managing Director of Infinite Equity. 

We shared insights on the equity-based compensation journey from seed to IPO and beyond, which we’ll discuss in this article. If you’re looking for a deeper dive, you can also download our free equity compensation strategy guide. 

Equity compensation strategies for growing private companies 

Let’s dive into the equity compensation strategies discussed during the webinar: 

1.) Emphasize employee education and communication. 

Equity is complicated. That’s why education and communication should be core tenets of your equity compensation plan. 

“Whether it’s stock options or restricted stock, education and communications for your employee base is super critical,” said Emily Cervino, Head of Industry Relationships and Thought Leadership at Fidelity.

“This is what helps employees understand and value their awards. If they don’t understand these programs and how they work, it can be a real dissatisfier for employees.” 

Employees might need education related to: 

• How Incentive Stock Option holding periods function for preferential tax treatment  

• Restricted stock units (RSUs) that vest contingent on IPO – and how/when they are taxed 
• If there are opportunities to sell shares pre-IPO 

“Help people illustrate and connect this obscure thing that they have to what it might mean in the future,” added Jon Burg, Managing Director of Infinite Equity. “Bring it back to ownership. Connect it back to the fact that they’re part of what you’re growing.” 

2.) Understand the journey from attraction to retention. 

As your company matures from the idea phase to product-market fit to multiple rounds of funding, your equity compensation plan will change, as well. 

Early-stage companies will use equity awards as a means of recruiting talent. When you start to see meaningful growth, you can also use equity to retain the employees that helped fuel your success. Oftentimes, the talent that helped take you from seed to Series A and beyond can become very attractive to other companies. 

Most equity awards will vest after three or four years of company operation. After this point, it’s often wise to refresh your equity awards — otherwise known as granting additional equity to key employees.  

Your plan may aim to keep early employees motivated to continue to vest and earn more ownership over time. This becomes easier when employees already believe in the vision of your company. 

3.) Determine if your organization is a fit for a pre-IPO liquidity program. 

A private company liquidity program helps provide employees with cash liquidity without needing to find buyers on the secondary market. A sponsored liquidity program provides liquidity or allows a third party to facilitate the transaction with buyers through a tender offer. 

There are a few distinct instances when a private company might consider implementing such a program. In some cases, companies with strong financial health will create a liquidity program to help early employees cash in on some of the value they’ve created. A program may also be created after a round of equity financing where there is excess demand for the company’s shares. 

According to Burg, a liquidity program can also be an opportunity to refine your company cap table and equity ownership.  

“It’s an opportunity to clean up the cap table and remove former employees and early investors that might not be producing towards the growth of the company,” he said. “It’s also beneficial to new investors coming in because you’re shrinking the potential shares outstanding.” 

4.) Incrementally upgrade your administrative solutions. 

The systems you use to record and track grants should scale with your company. The closer you get to IPO, the more complexity is created due to regulatory compliance, oversight, and disclosure.  

Private companies should refine their equity compensation practices as they grow. Decide who is responsible for managing the cap table, and what resources or additional hires you’ll need as you grow. 

“Leaving out the practical and administrative component can really jeopardize your ability to execute successfully on the strategy and can create hurdles as you approach IPO,” Cervino said. 

Too often, one person is trying to handle all aspects of equity-based compensation. She recommends either acquiring in-house expertise or partnering with a firm or service provider to ensure your bases are covered. 

5.) Consider an ESPP as you approach an IPO. 

Employee Stock Purchase Programs (ESPP) are broad-based, voluntary plans funded through payroll contributions that allow employees to purchase stock on favorable terms. The money typically goes in on a post-tax basis, as opposed to a traditional 401(k), which is pre-tax. 

ESPPs are growing in popularity; 44% of IPOs since 2021 have launched an ESPP, with others currently working towards launching ESPPs that were approved pre-IPO, according to Fidelity Internal Data Analysis. 

“The days of granting deep into the organizations – perhaps to all employees – sometimes sunsets at the point of IPO, when companies are increasingly concerned about dilution and costs,” Cervino said. 

“ESPPs are a really effective way to help companies share ownership broadly at a cost and dilution point that they can tolerate.” 

She added that approving an ESPP while your company is still private offers unique advantages. It’s typically easier to get shareholder approval and to implement an evergreen provision for an automatic replenishment of your share pool. 

Although the approval for an ESPP can occur prior to IPO, the program itself is only active after an IPO occurs. 

Get support in navigating equity compensation strategies 

These equity compensation strategies should help guide your operations as you scale. Be sure to download our Equity Compensation Strategy Guide for Private Companies if you’re looking for a deeper dive. 

Fidelity Private Shares is committed to supporting private companies as they journey from idea to IPO and beyond. We’re more than a software platform; we provide support for private companies, from fundraising strategy to pitch deck reviews to investor introductions.  

Schedule a demo to learn more about Fidelity Private Shares.

Infinite Equity and Fidelity are not affiliated. 

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