Rawan Baddour and Zuhair Shamma are the co-founders of UAE-based Zest, an equity management platform
Despite the region making great leaps of progress over such a short period of time, the venture ecosystem is only just starting to mature compared to western markets… and we’re yet to see how exits will evolve. So in a region where it can take over seven years from inception to exit from a startup, it is imperative to think of solutions that allow the company’s most crucial stakeholders - its employees - to achieve liquidity along their journey, solutions that keep them both motivated to continue that journey, and loyal to their startup’s ethos and vision.
After over a decade of modern entrepreneurship in the region, you have probably heard of, or possibly even experienced, stock awards like restricted stock units (RSUs), phantom shares, and employee stock ownership plans (ESOPs). In essence, they all aim to achieve a similar goal - giving employees stock (equity ownership) in the business that vests over time.
Companies often offer employees stock awards in the form of a contract, as part of an overall compensation package. Stock awards usually come with predefined conditions, though, to avoid people from joining startups just to make a quick gain and then leave.
A commonly enforced restriction is time spent with the company. Effectively, startups would reward employees with stock in exchange for pre-defined tenures of employment. For example, the company may require a period of time (referred to as a ‘cliff’) that employees need to spend with the company before they become eligible to own stock. And then, the amount of stock promised at the time of hiring is issued over a predefined period of time (a ‘vesting’ period) at pre-set frequencies or dates (a ‘vesting’ schedule). The cliff and vesting period associated with equity compensation plans (often structured as a one-year cliff with a total four-year vesting period) help with talent retention; meaning, they aim to encourage talent to stay within the company and commit to its long-term growth as shareholders.
But is this really effective? Do these collective ownership programmes drive motivation and thus exceptional performance for an organisation?
A trend that first started in Silicon Valley is now a standard benefit of working for any technology or venture-backed company. In the US in particular, stock awards are an essential component of an employee’s compensation package in early stage startups.
To dig a little deeper, let’s look at understanding the intended benefits of stock awards and why we have adopted them, especially in startups.
There are various factors that attract individuals to work at any given company. Believing in the product, mission, or culture of the company are just a few, though compensation remains at the top of that list.
Startups are often not able to offer salaries that are as high as what other, more established companies can offer their employees, so they add other factors that they think are attractive to the total compensation mix. Factors such as flexible benefits and more importantly, stock awards.
Stock awards, in particular, are a powerful tool that allows companies to attract individuals who believe in the long-term potential of the business. In addition to helping make an employee’s overall compensation package more attractive, giving employees stock (equity ownership) aligns incentives toward the company’s future growth and success.
Now, the part that makes a tangible difference: Can employees actually sell their stock awards?
Yes, sort of. Employees can generally sell their equity, conditional on company approval and depending on the type of equity compensation plan - but, this process can be cumbersome and riddled with administrative hurdles. Liquidity typically becomes available to employees once the company has experienced an exit event (e.g. IPO or company acquisition), whereby employees could potentially sell their equity to the open market or to a specific acquirer. However, until the startup has gone through an exit event, the equity owners — including employees — do not tend to readily have a market to sell their stock awards, making this asset illiquid.
Some companies also run equity buyback programmes with employees where they offer to buy back the stock awards that they have issued to them, at a particular price, as a means of providing liquidity to them prior to an exit. These are typically one-off programmes and therefore not a consistent liquidity option for employees. Some may even argue that buybacks are not the best use of an early-stage company’s capital when they can instead be used to fund growth. Nonetheless, we have seen buybacks occur more frequently in the Middle East and North Africa over the past few years.
Being traditionally illiquid, however, does not make stock award programmes “bad” in any sense, in fact, illiquidity has been built into these programmes by design, and, as such, has not been considered a tangible go-to cash option for employees should they need to suddenly access some liquidity — for example: to fund unexpected life events.
What are the benefits of providing stock award liquidity?
Owning a share of what you are building, having skin in the game - or any other way you want to put it - definitely brings a different level of engagement and commitment to a company. Like anything in life, ownership brings with it a deeper sense of responsibility.
Providing controlled liquidity and allowing employees to supplement their income is very likely to improve engagement even further and empower them as true stakeholders - creating a positive effect on their day-to-day and overall company performance.
What is controlled liquidity and where does Zest come in?
The numbers have shown that companies that adopt stock awards have a higher level of longevity - meaning they stick around longer than their counterparts. Stock awards have also shown higher percentages of employee stability and productivity in comparison to companies that do not have them, so it is safe to say that they are doing a great job so far.
Controlled liquidity is one of the key components to the sustainability of that success,whereas a company is able to launch a programme that sets liquidity windows over time, similar to how equity vests over time, and gives employees access when and if needed during those company-set liquidity windows. It is a more balanced approach that is motivated by retention, engagement and shareholder value. Too much liquidity works in the exact opposite way: Short-term gain versus engagement and long-term commitment.
Zest provides the tools for companies to develop and launch controlled ‘liquidity as a benefit’ programmes tailored to their specific needs. The idea is for these programmes to be built into an employee’s compensation / benefits plan – with small percentages of vested equity tradeable over time, as long as they are actively employed and performing. This has the added benefit of relieving the pressure on the company to increase the ‘cash’ portion of employee compensation.
We are starting to see this trend gain traction globally - putting controlled liquidity programmes into action as part of stock awards not only gives employees a sense of attachment to the company’s cause, it keeps them motivated to push for the company’s success. It makes sense. A well-compensated employee that is able to meet life’s demands is a happy employee, and that means a lucrative future for everyone - the company and its stakeholders.