April 18, 2019 –
Traditionally, option grants were only offered at the time of an employee’s initial hiring. Back in the 1990s and 2000s, the time to liquidity was generally shorter than it is today; it was harder to come by a job, and companies didn’t need to be overly generous. As the time to liquidity has increased over the past 15 years, and the tech ecosystem has greatly expanded, the battle to hire and retain top employees has become much more intense — thus current employee refresh grants were born and now commonly used for employee retention.
Today, most startups are refreshing their compensation package because they’re acting on the defense and trying to keep great employees from leaving and taking a job with a competitor. This conversation typically arises around the three year mark and tends to be somewhat planned or formulaic.
Step one should always be to identify your WHY. Before anything else, make sure you’re crystal clear about what problems you’re trying to solve. What’s the purpose of this refresh? The design and changes you’re looking to develop really need to align with the goals and the outcomes you’re hoping for. Needless to say, this step is really the backbone of your refresh process, so you want to make sure it’s as solid as possible before diving into the details.
Companies typically decide it’s time for a compensation package “refresh” for one of two reasons: to retain great employees and add some “glue” to help you hold onto a great employee, or to reward strong performance (and encourage it to continue).
Implementing a refresh plan – best practices:
- From a retention perspective, if you wait too long to put your refresh program in place, you may not have enough shares or be able to fix any issues. Start thinking about putting a formal refresh program in place at about 3 years into employment.
- Performance-wise, the power of compensation is not just what you’re giving, but when you’re giving it. Keep in mind that it’s often better practice to give less –but more frequently. It’s also usually just better for the company to give smaller refresh grants than one large chunk of company equity at once.
- If you’re going to move from a reactive program to a more timeline-based, formal refresh — make sure to continue to assess performance with the same standards and frequency in accordance to the rest of your organization.
- Take a step back and think about what message you’re sending to the organization as a whole. If you decide to give refresh grants too soon or to a large chunk of the company — how will that affect the other employees? Will the employees granted the option actually get the message you’re trying to send? Lacking strategy and perspective could risk giving too little to everyone and sending the wrong message — or sending no message at all.
Lastly, make sure the entire organization understands the refresh grant policy and how performance is measured. Offering refresh grants is often the key to retaining top talent — and the key to refresh grants is to make sure your process is consistent, fair, and transparent.