In a year that has seen the wealth gap widen to a chasm in the wake of Covid-19, attitudes are hardening among both workers and bosses around the need to share the fruits of business success more widely, according to a new study by equity management fintech, Capdesk.
The research, which surveyed employees, founders and CEOs at private equity-backed UK startups and scale-ups, found the strength of feeling is such that the vast majority of employees (80%) and business owners (78%) actually agree companies should be required by law to offer equity share schemes to their workforces.
Christian Gabriel, CEO and Co-Founder of Capdesk, said: “We know the employee equity drumbeat has been growing louder but we were still pleased to see the extent of enthusiasm uncovered in this research, in particular how closely aligned management is to its employees.”
The Covid effect: Build back fairer
Founders and CEOs (94%) feel even stronger than employees (90%) that business has a responsibility to play a leading role in making society fairer, with 89% indicating the pandemic has made them more focused on how their own company can directly contribute to this cause.
What’s more, they are willing to follow through on that belief with over three quarters (77%) saying the Covid crisis has made them more likely to offer, or increase, employee equity.
Gabriel said: “After an extremely challenging year, it is encouraging to see something positive emerge: a fundamental shift towards distributing business wealth with more of those responsible for creating it.”
Unlocking equity in crisis
The economically devastating impact of the past nine months did not spare the fast-growth sector, with a significant proportion of business leaders revealing they were forced to take tough decisions to survive:
- Major cost-cutting, including employee rewards and benefits (33%)
- Furloughing staff (28%)
- Freezing promotions and salary increases (26%)
- Freezing hiring (24%)
- Reducing salaries (19%)
- Cutting jobs (18%)
However, as cashflow dried up a sizable number were able to leverage company equity to offset the austerity imposed on employees and even avoid the most drastic action. 42% of businesses offered equity share options to newly promoted employees in place of salary rises, while 32% used equity to save jobs by agreeing to salary reductions in return for share options.
For their part, employees have displayed an understanding of the challenging economic situation with many open to receiving increased equity as compensation. Half (49%) say they would take shares in place of salary increases for promotion, while 41% would accept a pay cut if equity is offered instead.
“Leaders are not only recognising the power of unlocking equity to drive their business and get through an economic crisis, but also the positive impact these actions can have on wider society,” said Gabriel.
Shortening the road to cash out
Despite the popular notion that an IPO is the ultimate goal for start-up employees to cash out on their equity, a relatively small proportion (13%) actually see this as a realistic route to liquidity.
Much more likely in workers’ minds is:
- The company buying back shares (32%)
- Selling shares to an investor or board member (32%)
- Selling shares to a third party on the secondaries market (31%)
- Acquisition, or merger, with another company (25%)
And with an established trend of equity-backed businesses now staying private for longer, it is perhaps no surprise there appears a growing impatience among employees to realise their shareholdings sooner.
The research reveals over half (57%) would wait no longer than 4 years to cash out, with nearly a third (31%) unwilling to wait more than 2 years. On average, employee equity holders are willing to wait just 3.87 years to cash out. Meanwhile, if given the option, nearly three quarters (74%) claim they would sell some or all of their shares tomorrow.
Gabriel said: “This finding reinforces the case for industry collaboration in creating easily accessible secondaries markets, with the goal of enabling employees and business owners to achieve liquidity faster.”
The case for employee equity
The findings point to a solid business and employer branding case for companies that offer employee equity share schemes, and risks for those that don’t.
80% of workers polled said they would prefer to work for a business that offers an employee equity share scheme, while 79% would be more committed to, and work harder for, a company that does.
On the flip side, workers believe a company not offering equity sends a bad message to potential recruits. Employees responded that it indicated a company was:
- Not purpose-driven and would be difficult to get behind mission (32%)
- Uninterested in contributing to a better society and only interested in profit (31%)
- Hierarchical and wouldn’t treat employees equally (31%)
- Uncaring about employees and wouldn’t be a good place to work (26%)
Meanwhile, the most common reasons leaders who offer employee equity cite for doing so are: it motivates and incentivises (34%), it’s the fair and right thing to do (32%), it boosts business performance (30%) and it attracts and retains talent (30%).
Some other interesting rationales included – due to investor pressure (24%), to release liquidity to partially exit business (22%) or, simply, to not look bad (10%).