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Is it easier or harder to build a successful startup now than in the past? In many ways, it’s so much easier to launch a startup today than in the past; the ecosystem is full of services, access to information is instant, the startup world is now a global industry where so much has been templatized and millions of “how-tos” are available, and a proliferation of venture capital, incubators and accelerators are more available than ever.
There are newer challenges that founders face today, however. Competition is global, the pace of innovation is constant and ever-accelerating, expectations are higher, and the road to IPO is longer. This last point could be the most interesting one; staying private longer changes the whole entrepreneurial journey and calculation. The clear path to liquidity via IPO or acquisition has changed, and leaders need to adjust.
Related: 4 Ways an Entrepreneur Can Increase Liquidity
How did we get here?
Today, there are around 1200 unicorn companies globally. There have never been this many unicorns or privately owned companies valued over $1 billion USD before. The two biggest reasons a founder takes their company public is to have access to capital and to provide liquidity for shareholders. However, today, the abundance of available venture capital has made it possible for founders to keep increasing valuations and postponing a liquidity event. Plus, there are now other ways shareholders can reach liquidity without necessarily going through an IPO or an acquisition.
Staying private delays the costly management and regulatory headaches of being publicly traded. Given all of the scrutiny and costly overhead of compliance and reporting required to run a public company, as a founder, you would probably prefer to grow outside of the public market. How does staying private longer affect founders, investors, employees and their company? And how does this change the way you operate?
A founder’s guide
Ten years ago, today’s unicorns would have gone public by now. Founders, VCs and employees would have converted their early investments and hard work into material wealth, however, that’s not happening in this market like it was in the past. Today, there are more options for liquidity for all equity stakeholders in companies without necessarily going through an IPO or acquisition. With more options for liquidity and a new entrepreneurial journey, founders should consider the following as they grow their companies.
To start, if this is your first time starting your own company, get a board member or advisor who is knowledgeable about different stock incentive plans, how to structure them, tax implications, etc. Find members with a broad perspective coupled with deep expertise in your market, and seek out people who are experienced investors.
Related: How Can Mentors Give Feedback to Founders without Discouraging Them
The second thing to understand is that balancing employee compensation is a key tool in your growth plan. How much will employees receive in salary vs. what will they receive as equity compensation? For most startups, the biggest expense is salaries. We all want top talent, but sometimes we can’t afford it; this is where equity comes in. Equity gives employees skin in the game. They are part owners, and if the company succeeds, they’ll directly benefit from it. You get better performance out of employees when they feel ownership as well. However, it’s important to adjust the compensation plan as the company grows. These are a few things to consider:
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Stage of the company: This directly relates to the risk the employee is assuming for taking this job. For both investors and employees willing to take the greater risk, they deserve the higher reward.
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Job function and level: Higher-level employees might expect higher salary compensation while lower-level employees might be more willing to accept lower industry pay in exchange for greater equity compensation. It’s mostly about the stage in life they are in; as younger employees often have fewer responsibilities, they are more willing to take a lower salary. People with families usually can’t give up as much in salary compensation.
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Market trends: What are your competitors doing? If you are offering something less interesting than your competitors, they might secure the best talent out there.
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Keeping top talent incentivized: As the company grows and takes in new funding rounds, but you want to guard your run rate and optimize your cash, issuing new stock options is a great way to retain top talent.
Keeping team morale high is key in down markets
The robust growth we’ve seen in the private markets in the last ten years directly affected how and why the private capital secondary market grew. Since 2012, the secondary market has grown to more than five times its previous size, reaching a record $130B in 2021. During this time, online platforms that allow shareholders to buy and sell shares in private companies have surfaced and shown great success.
We’ve been facing downturns and market instability and witnessing downward pressure on valuations in this market. Leaders steering a winning company must keep a perspective on the longer term, knowing that valuations are cyclical. It’s important to stick to fundamentals and assure shareholders that you see the path through the market’s vicissitudes.
Related: 3 Simple Strategies to Boost Morale and Get the Best Results From Your Team
Importantly, leaders need to tend to the people who built the company with them — which takes us to the third piece of advice. When employees have dedicated years to the cause, holding dreams of material wealth, delayed liquidity events threaten the very morale leaders need to keep the company strong. As a founder or leader, you should seriously consider the option for employees to sell shares in the secondary market without adding too much overhead to the cap table.
Having employees work for extended periods of time with only paper wealth, while industries, competition and technology innovation never slow, can be risky. Giving employees the chance to convert their paper wealth into some tangible wealth could be the morale boost that saves the day.
