We’ve gone through (and are still going through) some unprecedented times, and unprecedented times mean that businesses, especially startups, need to get creative. The last 12 months or so have seen stories of incredible innovation; of companies pivoting brilliantly to expand their digital offerings or tweaking their services to generate new revenue streams that COVID-19 curtailed.
Even with all that innovation, however, many businesses are still facing stark decisions. Many companies are making workers redundant, in order to free up cash to weather the storm, and hopefully survive to a point where they will be able to ramp up again after restrictions are lifted.
But some startups have a different idea.
Equity has always been one of the main reasons – if not the only reason – for employees to join startups. Options in a startup can end up being far, far more valuable than salary, or shares offered in a public company because a startup has nearly unlimited potential. If a startup has a great idea, and an equally great model and delivery, it can be the next Facebook – and early employees with lots of startup equity stand to make a fortune.
Startups generally offer equity for a simple reason. If you believe in a company, you’re going to work hard. But if you believe in a company and you stand to profit from that company’s success – you’re going to work extremely, fanatically hard.
Not only that, but startups generally don’t have much cash available. Offering equity can help make up for the lower salaries, which allow companies to deploy their cash directly to their product. And now, in the face of the current pandemic, some startups are taking this a step further.
Instead of laying off employees, some startups are reducing salary but making up for it with equity. In short, they are offering stock to offset their salary reduction.
Using equity to retain talent
It’s easy to see the upside in this. Many companies around the world are simply cutting staff. Many others are reducing their salary without offering anything in return. This way, the employee keeps their job and has something to cushion the financial blow. And the company can use the cash to protect against whatever financial turbulence is coming down the line for the next year.
Medal.tv is a gaming startup that recently rolled out this plan. The employees have taken a salary cut, but have been offered restricted stock units with a one year vest. Co-founder Pim de Witte is quoted in a recent Bloomberg article: ‘If everything goes well, not only does the company save money and slow down its cash burn, but the employees that exchange their salary for the stock will have a bigger payout during our Series B round.’
It makes sense, but it’s also completely optional. Which is truly a testament to the strength of equity. Those employees would willingly take salary cuts to help the company, while working harder than ever – this would be nearly unthinkable in companies without equity. But employees with equity understand that if their company thrives, they thrive too. Helping the company in a moment of crisis makes long-term financial sense.
Every decision is a risk, but some are riskier than others
Of course, there is a risk; with options, and indeed with startups in general, there is always a risk. If you’ve backed the wrong horse, and the business goes under, then the startup equity isn’t worth anything. It must be said, however, that Medal’s product, video games, lends itself well to the current pandemic – its user growth rate has doubled since lockdowns began.
Besides, many startups don’t currently have any other options. At least this way, the employees still have a salary and a promise of a better future. And a startup that has reduced salaries, rather than made workers redundant, will be in a much better position to hit the ground running when the crisis passes.
It’s tough to know what to do right now – what the right thing is, and the right time to do it. But startups like Medal have made a choice that helps their employees and keeps their business strong. It’s a great example of the way equity strengthens businesses, and gives them more options for success.
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Please Note: This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
