How to navigate the equity minefield when joining a startup

Andy Bellass is co-founder of HR software startup Hibob. Santa Monica Talent’s Ellis Seder sat down for coffee with Andy to learn his thoughts on startups, the secret sauce that helps a business grow, and how to navigate the minefield of negotiating equity in a startup environment.

I’m always amazed by how few startups hire a Marketing/Brand Leader as early as possible. One of Hibob’s best moves was having a brand leader like Andy as part of the founding team. This has helped the company stand out in the highly competitive HR software space.

After a long career working with corporates, Andy began is startup career at a more senior level.

I begin by asking him what gave him the confidence to leave a stable corporate job to join the unpredictable startup world?

“Before we founded Hibob, I spent a number of years working as a consultant for many startup brands in London, The Bay Area and Tel Aviv,” Andy says. “What I found was the skills I had developed over the years were even more applicable to startups where by and large their genesis comes from capability rather than Product Marketing fit. My role then became about shaping that capability in a much clearer consumer proposition.”

“In 2013, I met Ronnie Zehavi (a hugely successful tech entrepreneur in Tel Aviv) through a close colleague, and we identified an opportunity in sorting the mess that is people management. We created Hibob as a ‘people operating system’ to sort HR Admin, Culture and Benefits and quickly raised $25m in investment from tier-one VCs to get going.”

THE REFRESHING WORLD OF STARTUPS

Moving on from Andy’s career so far, I want to delve into the lessons he’s learned over the years, his observations and his predictions for the future. What does he see as the differences between working with established brands vs a startup?

“Working in a start-up world is hugely refreshing. Anything is possible. People’s start point is one of optimism, of what can be done, what can be created and solved, not just how to polish what’s gone before. When I was serving FMCG brands who have been around for 100 years, it’s all about stealing market share from another FMCG brand and working with career marketers who treat their role as a stepping stone to another FMCG company.

“At a startup, you are generally working with young people who have an idea and they want to change the world. They are not constrained by legacy organizations and process, they are dealing with a blank sheet of paper with huge belief, a strong spirit and high energy.”

NAVIGATING THE OPTIONS MINEFIELD

One of the most common questions from candidates interviewing within a startup is ‘what equity is on offer?’ and ‘how much is this worth?’. I ask Andy what questions he’d advise candidates to ask to help them through the equity and options minefield.

“This is a big subject! Before elaborating, one thing I have learnt in all these package discussions, is that:

People are never happy – it’s a natural belief that we all think that we are worth more than what we are offered.
Nobody really understands equity and options!

“I have been in situations where you give people options and then you hear them telling their mum they got equity in the firm as if they own part of the company. They do not understand that even if you stay in the firm for say five years and you’ve got options, you don’t actually own anything. You have the option to BUY something, and if there is no exit event then usually there is nothing. Although if there is and you’re in, then great!

“But even when there is an exit event, they are not aware that there is potentially tax to be paid, or it is possible that the option value at the exit event could be lower than the value it was bought at. It’s a minefield.”

“People’s start point is one of optimism, of what can be done, what can be created and solved, not just how to polish what’s gone before. ”

PART OF THE PACKAGE

Andy says startups use options as part of their overall packages to keep employees motivated and to retain them over the long-term.

“From my perspective I always look first at the people and the potential. A lot of companies I just help for nothing because even though I may not get any material gain, I really believe in the people and their idea and I have the view that, at the end of the day, what goes round comes around.

“Taking options instead of a large base salary is risky but the rewards can be huge with early-stage employees of Facebook, Twitter etc. having a life changing event on company sale but there is an opportunity cost of your time if it doesn't work out.

“You must have a great deal of confidence in the business that its’ not riding the latest trend wave. It is imperative to ask the founders directly for the formula they used and the compensation value they attribute to the shares or options for a sense of perceived value. Knowing the number of shares, the total number in the pool, cap table, and their plans to expand the pool will be invaluable.”

Andy says deciding if the risk/reward payoff is worth it involved assessing the pros and cons:

The benefits of joining a startup are:

The chance to help shape a company
A creative and high energy environment
Flexible working
Learning a lot more about building a business than in a niche corporate role
Being allowed to innovate
A casual atmosphere
Feeling like you’re really making a difference
The potential to increase your options stake x10

Negatives of joining a startup are:

Job stability/security
You earn less than in a corporate job
Less structure in your day
Unpredictability

MAKING SENSE OF EQUITY

I find ‘equity’ is one of the most misunderstood terms in tech recruitment. Andy is happy to straighten out what is meant by this startup-centric term.

“Equity is usually only given when you are one of the original co-founders, it is to be negotiated either right at the beginning or even before the company is formed. Or it is bought… i.e, stocks and shares.

“So, let’s say you are a one of the four co-founders of a business. When you ‘found’ a company, technically it has no or only minimal value. Say you set a value at, say, 1p per share and you divvy that up according to the founders’ shareholders agreement. If within five years your business was worth £10m and you were given 25% of it, then that £2.5m is seen as having value and you will thus be taxed accordingly. Options, on the other hand, only have potential value.”

For both options and equity, Andy says you need to consider the vesting period. Without a shareholders’ agreement, one of these four co-founders can walk away having done no work and yet still hold a valuable stake in the business. Setting a vesting period is important, to ensure your people are committed. Any investor will demand it, and so they should!

Apart from understanding the vesting period, it is important to investigate the funding model of the business. Knowing the number of investors and funding rounds, and the company’s growth potential, can help you determine if your equity offer is fair. Equity can become diluted as more investments are made and more employees join.

SECRET SAUCE

And now for the million dollar question, the secret sauce of a startup. I ask Andy what he thinks are the critical ingredients to building a successful scaleup to the point where it can be sold.

Andy breaks down the critical ingredients he’s seen during his time in startups:

An amazing leadership team
The founder has the ability to raise funds
A disruptive idea
A focused and singular vision that everybody buys into
A lot of good luck

KEY TAKEAWAYS

There is a gap in knowledge about stock and options when it comes to startup recruitment
It’s hard to find information on equity offered within seed-stage startups
How does a startup compete with larger companies? Maybe not with cash but you can offer stock options and shares with the potential upside
In Europe there are some differences to the US startup stock options model. European startups offer a much higher stock percentage to leadership executives than junior staff. It seems to be the opposite in the US.
UK has the strongest EMI and stock schemes among European markets, closely followed by France.
Find an equity calculator here.

Quick questions for Andy Bellass:

Your morning routine:

“My day usually starts at 6:00am. I try and do some exercise, try to see my daughters, and get on my bike as quickly as possible.”

What are you reading at the moment?

“Too many books that I doubt I’ll ever finish, including the brilliant 21 Lessons for the 21st Century by Yuval Noah Harari. I just started my first audiobook as well: Ray Dalio of Principal: Life & Work, which is great.”

What podcasts are you listening to?

“Table Manners with Jesse Ware, Reply All and I’ve just finished Conviction.”

What’s your favourite restaurant?

“Kimchi Japanese in Highgate, North London. Awesome and authentic.”

What’s your fitness regime?

“Yoga (DownDog), meditation (HeadSpace), and as much cycling as I can get.” (It seems to be working, as Andy looks 15 years younger than his age).

Shoes or trainers for the office?

Trainers (Nike / Converse)

Apple Watch or classic watch?

Both. Some days it’s about the data, others it’s about not trying to look like everybody else

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