We recently connected with Oren Barzilai, CEO at EquityBee, the startup employees’ stock options funding solution.
Oren Barzilai from EquityBee talked about what led to them compiling their latest report on startups. Barzilai also discussed how common stock options have become at startups. In addition to sharing these insights, Barzilai also commented on how firms can ensure that workers remain motivated and adequately compensated for their efforts.
Our conversation with Oren Barzilai is shared below.
Crowdfund Insider: What prompted Equitybee to compile the latest ‘state of startups’ report? Who was this data collected from?
Oren Barzilai: We’re constantly working to identify new market trends and investor demand. In light of the 2022 market volatility, we conducted comprehensive surveys to better understand the current state of the startup ecosystem, beginning with the employee perspective. Using this data, we compiled a comprehensive report to provide insight into the state of the union within the private market.
For this report, we interviewed current startup employees on a variety of topics, including equity and compensation packages, employee benefits, hiring practices, company culture, and current market sentiments.
Crowdfund Insider: Currently, how popular/common are stock options at startups?
Oren Barzilai: Based on these survey findings at Equitybee, stock options continue to be a popular part of compensation packages at startups. 70% of employees working for 2+ years at a startup received more than one employee stock option grant. In addition, the average amount of vested options that startup employees receive, according to Equitybee’s platform data, is $144,367.
Crowdfund Insider: How can employer-provided stock options help potentially combat employee burnout and increase retention?
Oren Barzilai: Our survey data shows that equity is a very motivating factor for startup employees, and rightfully so. Exercising stock options can potentially provide a financially life-changing experience for individuals.
An overwhelming majority of startup employees (92%) agree that stock options increase their sense of belonging at a company. 73% agreed that options can impact their financial future, with 70% saying they are motivated to work harder when they receive options. Based on these numbers, offering employees stock options can tremendously impact employee happiness and drive at work.
Crowdfund Insider: What are some challenges employees face when it comes to their stock options?
Oren Barzilai: The biggest hurdle for employees is simply not knowing enough about their stock options, so in turn, they end up not participating and leaving money on the table. Looking at the numbers, 65% of employees do not know what percentage their options represent, 38% do not know the value of their options, and 15% feel they do not have enough information to exercise their options.
We are seeing an upward trend in the lack of education. Based on our previous data, over the last 6 months, the percentage of startup employees who would prefer a higher salary over a bigger stock options package has doubled (from 34% to 67%).
Crowdfund Insider: How can employers solve these challenges?
Oren Barzilai: Transparency and education are the biggest pieces of the puzzle. As shown through the data above, the lack of knowledge among employees is the biggest hurdle in exercising options. Employers and HR teams should set aside dedicated time to walk each employee through their options and what they need. Almost a quarter of startup employees do not even know it’s possible to negotiate option grants as they can with a salary.
In fact, 68% of startup employees say they negotiate their salaries, while only 42% negotiate their stock option package. Helping employees with this process will make a huge difference in employee sense of belonging at a company.
Crowdfund Insider: Amidst the recent market turbulence, what has Equitybee been seeing in terms of employee sentiment toward stock options?
Oren Barzilai: We see that employees recognize that the risk can be higher amid a turbulent market. Since Q3, 99% of startup employees are not fully exercising due to risk. Additionally, right now, 66% would prefer a higher salary in exchange for a smaller option grant, due to the market turbulence. For perspective, that number nearly doubled from Q2 to Q4 2022.
Startup employees are asked to invest deeply in the companies they work for, dedicating time, energy, diligence, and in many cases, financial risk. For many, the allure of working for these types of companies is to eventually participate in an exit event, but the current economic headwinds have put workers’ interests at odds with investors. It’s admirable when companies can set a timeline to reward their employees for their loyalty and service over the years.
Crowdfund Insider: You’ve said before that equity needs to be equitable. Can you elaborate on this topic?
Oren Barzilai: In today’s workplace, topics such as DEI programs, equal pay, and paternity leave continue to be hot-button issues as we work towards being a more inclusive and equitable society. Oftentimes, stock options are not considered as one of these topics.
I believe that the process of exercising stock options should be transparent and straightforward, regardless of someone’s background or financial situation. In a typical scenario, those who buy their vested options during or after their employment are executives and other high-level, high-salaried employees who have access to extra cash or may be able to borrow money from their families.
Based on our past research, a full quarter of American startup employees cannot afford to exercise their stock options. And employees are not shareholders in a company until their options are fully exercised. In simpler terms, the right to ownership only turns into true ownership if you can pay for it.
Crowdfund Insider: As we navigate through tax season, what should employees know about taxes and their stock options?
Oren Barzilai: Unclear tax expectations can be another factor that drives employees away from exercising their stock options. This is another piece of the puzzle when it comes to HR teams and companies educating their employees about all implications of a stock option package.
First is understanding the type of stock option. Exercising Incentive Stock Options (ISOs) will typically result in more favorable tax treatments than other stock compensation programs like non-qualified stock options (NSOs) or restricted stock units (RSUs). Also, unlike NSOs, which are subject to ordinary income tax rates, ISOs may or may not be subject to the Alternative Minimum Tax (AMT).
In general, ordinary income tax rates are relatively higher than AMT rates. So, depending on your household’s adjusted gross income level, you may not even be subject to AMT if your income does not meet certain thresholds. This is a huge benefit for employees who can exercise ISOs.
There are also other requirements that you must meet to take advantage of these tax benefits. For one, you need to meet these holding requirements:
You must have held your ISOs for at least one year after exercising, and
You must have kept your ISOs for at least two years after the options were granted.
If you meet these requirements, exercise your ISOs, and ultimately profit off the sale of your stocks, these profits will be treated as long-term capital gains. This means that they will be taxed at a significantly lower rate than the ordinary income tax rate.