A standard approach to new hire equity for public tech companies is a new hire grant ~2x the refresh grant, followed by annual refreshes, all with 4-year standard vest. The problem with this approach is the big drop off in vesting in Year 5 — in effect, you’re signaling to employees that’s the time to leave. How can we avoid this cliff? A simple way to accomplish this goal is with the combination of a front-loaded new hire grant and ratable refreshes. The key drivers to make this program work are: Front-loading the NH grant — this helps eliminate the cliff in year 5 Reducing the NH grant multiple — this also reduces the cliff, and lowers total spend Moving to 3-year vests — this pulls more vesting value forward Notice this actually saves the company money too. When we lower our new hire multiple from 2.0x to 1.5x, should we be worried it’s less attractive to the candidate? I think no, for a very specific reason: people rationally discount future value. Check out my full post below. 👇 And this isn't the only solution - how else can you adapt your stock comp design to minimize cliffs? #compensation #totalrewards
Some technical observations here: - Your example shown is one of many possible ones - and all depends on expected share price at vesting (something that should be looked into), which can change the figures radically. - When you say ‘4 y. standard vest’, you are implying asymmetric annual vestings over the last 3 years of the tranche for grant 1 (“NH”), whereas grants 2 to n have equal 1/3 vesting over 3 years. No surprise that accumulated vesting changes. - The “signaling to leave” may or may not be there, and the combination shown is one of many possible ones. - A NH grant has a purpose different from regular grants or in usual tech pay parlance, “refreshers” - the former is rather to attract professionals, the latter is more to help with long term value creation, contribution to it by the employee, and retention. - Beyond a 1.5, 2, ‘x’ refresh ratio, it would be important to see how the annual grants play out vs. the structure and balance of individual Pay Mixes. Too much or too little ? And of course, what these figures mean in terms of dilution, overhang, use of stock coming from different series if in a startup. Example that illustrates several things to consider at program design.
Josh Radman
5mo
this is interesting and I love the proposal -- but how much impact do we think it will have if 75% of employees are already leaving after 3yrs? Data from Carta, below!
Charlie Franklin, thank you for sharing. This is really good and a great way to save cost, keep TC even for the employee and get rid of uneven realizable comp.
Bobby Dysart
5mo
But is a Year 5 signal to leave intentional? 🤔
Torsten Walbaum
5mo
Tweaking the general vesting schedule is helpful. But I think what’s most pressing and impactful is designing equity refreshes and other incentives on a personalized basis to ensure you retain your top talent.
Insightful! Thanks for sharing Charlie. Anything that’s “standard” or the “market norm” is something I tend to pause on and review to ensure it meets the needs of your organization. This is a great example of elevating the approach to rewards.
Ryan Hammond
5mo
Thanks Charlie! This is an inventive solution to the issue. One thing I absolutely agree with is avoiding cliff vesting or equity cliffs when people end their new hire grants - especially for talent you want to keep which I would say is anyone who isn't performance issue. If some one is performing their core functions up to your required level you don't want to incentivize them to go out searching. I am still a fan of no cliff box car style grants communicated in advance or given with the same consistency that layering does. They are simple to administer and simple for the employee to understand and keeps the employee vesting at your chosen market rate. I like 3-year or 2-year box cars depending on what the company is trying to accomplish and its dynamics. Just another flavor of a solution when your focus is maintaining a market competive foundation for vesting. You can also stack performance grants on for differentiation without too much added complexity.
Matt McFarlane
5mo
This is what I love to see on LinkedIn. Thanks Charlie!
CEO @ Compa | Modern compensation intelligence
5moRead the full newsletter post here: https://compapeergroup.substack.com/p/how-to-eliminate-unwanted-cliffs