How to Attract and Retain Top Techs by Offering Business Equity
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How do you recruit and retain top technicians in the trades when vying for high-producing employees in an extremely competitive job market?
Instead of reinventing the wheel, simply follow the path forged by other start-up businesses (technology companies, for instance). Try rewarding employees with equity in your business to give them a sense of ownership, says ServiceTitan’s Vice President of Business Operations Connor Theilmann.
“When I talk to contractors, they always want to know: ‘How do I find and retain the best folks?’ The complaint is always about someone leaving the company for a few extra bucks or a few extra perks,” Theilmann says.
“It reminds me of what we’ve done in technology. Most public companies you can buy stock in, or find a way to make their employees owners in some way, shape, or form.
“The most common way we’ve found is they provide employee stock options, which align the interests of the employee with all of the shareholders, because they themselves become owners in the company.”
An employee equity program creates a strong retention tool for most companies, he says.
“The idea that we can have a system to make employees feel like owners ... is very powerful,” Theilmann says. “Some describe it as ‘golden handcuffs,’ while others will say it’s a way to create generational wealth. It gives employees a reason to stay at a company for a very, very long time.”
To explain the ins and outs of creating an employee equity program, Theilmann joined ServiceTitan Director of Rewards Dave Allen and Director of Customer Relations Chris Hunter in a recent webinar to discuss specific ways to recruit like a startup.
We dive into each below, but here’s an overview of what you’ll learn:
How startups (specifically ServiceTitan) leverage equity to attract top talent.
Other types of incentive packages based on your type of organization.
How to incentivize your team members to stay with your business long term.
Pay and bonus best practices to appropriately reward your top performers.
What are startups trying to achieve?
Allen says the current trade labor shortage impacts companies in the skilled trades much like the lack of qualified software engineers impacts technology companies.
On the technology side, software engineering companies fight each other for top talent, because one brilliant software engineer can do the work of 10 average software engineers, he says.
Both industries must combat a limited labor pool in order to fill vacant jobs and complete more jobs.
“The same thing happens in the trades, where you can’t go after more customers because you don’t have the techs,” Allen says.
Startups also try to:
Attract and retain top talent working at a less-stable employment destination.
Conserve cash by offering equity and a lower base salary to make funding last longer.
Compete with other companies issuing equity. “Big companies like Google and Facebook are still giving out a ton of equity to employees because they have to, otherwise their employees would all go to startups,” Allen says.
Share ownership and success of the company with employees to get everyone working toward the same mission.
Use equity to motivate employees to focus on long-term goals and secure employment.
Traditional incentive programs (like bonuses) aim more toward short-term results, which may not be in the long-term interest of the company, especially if they damage your company’s relationship with customers.
“To hit those goals, some people may not do what’s in the best interest of the company over the long term,” such as pushing a product on customers they don’t really need, Allen says. “Using equity for long-term focus and bonuses for short-term focus balances each other out.”
Typical compensation structure and startup compensation evolution
For most public companies offering equity, the typical compensation structure looks like this:
Base salary: Lower than average
Short-term bonus potential: Lower than average (if any)
Benefits: Minimal (if any)
Equity (stock options): Higher than average, but relatively worthless when granted.
Early-stage employees generally accept lower cash compensation in exchange for equity.
Equity offers upside potential, but 90 percent of all startups fail within 4 years.
Before working at ServiceTitan, Allen took a job at Snapchat—even though the tech company offered a lower base pay.
“I took a huge pay cut, which was hard to swallow. But they gave me a lot of equity, which was really worthless at the time they gave it to me,” he says.
That equity is now worth a good deal.
“It’s kind of a risk-value proposition,” Allen says. “If you go to a startup, is this bet going to pay off? The reality is, 90 percent of those startups fail. So, that’s the tradeoff in a startup world.”
As a startup becomes successful, cash preservation becomes less of an issue and base salaries and short-term bonus programs can increase. Companies also reduce the amount of equity given to new hires, since the risk of failure decreases. This represents the natural evolution as valuation and stability of a company improves.
Generally, the big winners in an IPO (initial public offering) are the early employees who took the bigger risks of less base pay or bonuses for more equity in the company.
“It’s amazing how similar it is between the trades and a typical startup,” Chris Hunter says. “Instead of an IPO, I mean, my goodness, private equity is all over (trade industries) trying to acquire these companies. So, that could be our IPO equivalent in the trades.”
Just be cautious, Allen warns. His son got a job at a tech startup right out of college, but the company folded two years later and the equity they gave him never paid off.
“He did get work experience out of it, but it’s very true that very few make it all the way,” he says.
Is an equity program right for your company? Maybe not.
Before starting an equity program for your HVAC, electrical, or plumbing team, it’s important to understand whether it makes sense for your company.
The corporate structure of your company drives your decision. C Corporations and some S-Corps often utilize equity to attract and retain employees. LLCs can’t issue stock options, but they can use some membership interest agreements to achieve the same purpose.
If you intend to operate as a cash-flowing business indefinitely with no plans for a liquidity event (selling your company publicly) that would allow employees to sell their vested interest, then offering equity will likely not achieve the intended effect.
“Then, you’re giving them something they can’t actually do anything with,” Allen says.
Terms and definitions for creating equity programs
What is equity?
One share or stock represents one piece of the company. Employees can own different amounts of stocks, which represents their share of ownership of the company.
A stockholder has formal rights in the company and will share in the long-term growth and value of the company.
If you give a shareholder voting rights, they will also have the power to help make decisions for your company. Do you want to give employees the power to weigh in on decisions made for your company?
Upside of equity
Equity means employees own a stake in a business they help to build and grow.
Employees get incentivized to grow the company’s value in the same way as the company’s owners.
Employee equity reinforces the idea of a true team, with everyone sharing in the gains and holding a financial stake in the company’s success or failure.
What are stock options?
A stock option gives an employee the right—but not an obligation—to buy a share at a fixed price (also known as the strike price or exercise price).
The strike price equals the price they pay to purchase shares.
Employees get to buy stock at today’s price sometime in the future (when the price hopefully fetches a higher price per stock—otherwise there’s no longer a retention incentive).
The main benefit of stock options for a company? You’re only giving an opportunity to purchase shares of stock—not actually giving away shares of stock.
Employees can only exercise their options in a given time period, generally for several years after the grant, and they’re dependent upon continued employment.
Stock options offer a retentive element, but not if option value goes underwater.
“Say you get an option for $10 a share. If the business is booming, they may be worth $1,000 a share. You’re going to be sticking around,” Allen says. “The reverse is true if the options go underwater, there’s no reason to stay.”
How to grant stock options
Typically, your Board of Directors must approve all stock grants. To be tax-free, the strike price of an option must match the Fair Market Value (FMV) as of the date of grant approval. However, you can use a different vesting start date.
Once the board approves the grant, you need to communicate the grant approval to the recipient, and they must “accept” the award via a document outlining the terms and conditions. Companies must document everything to limit any future disagreements.
What does vesting mean?
Vesting refers to a period of time that must be met before stock options can be purchased by an employee. This incentivizes the employee to stay and contribute to the team over that time period and avoids rewarding employees who don’t hack it for long.
Typical equity awards vest over a four-year period, although shorter or longer vesting schedules can make more sense, depending on business needs.
Many vesting schedules contain a cliff.
A cliff means a waiting period before any shares vest.
A one-year cliff is a common practice (and what ServiceTitan offers).
If retention remains a concern, consider a four-year, back-weighted vesting schedule. For instance:
10/20/30/40 (1st year = 10 percent; 2nd year = 20 percent; 3rd year = 30 percent, 4th year = 40 percent)
5/15/40/40 (1st year = 5 percent; 2nd year = 15 percent; 3rd year = 40 percent; 4th year = 40 percent—the most common setup for tech companies)
0/0/0/100 (no equity for first three years, but really pays off in fourth year)
“There’s also a downside to vesting,” Allen says. “Let’s say the stock goes way up, and you’ve got an employee who’s just not producing anymore, but he won’t leave because he’s got these options. (To the employee), they’re golden handcuffs, but to the company they can be like lead handcuffs.”
The upside? If you fire that employee, you get those stock options back.
Equity programs can work in the trades by rewarding employees based on how much time they give to your company.
Vesting sample from ServiceTitan:
Vesting schedule is 25/25/25/25, with a one-year cliff and monthly vesting thereafter.
Nothing vests during the employee’s first year.
If an employee leaves the company before their first anniversary, they leave with nothing. This prevents a bad hire from leaving with a piece of the company.
Downside of a “true golden handcuff” scenario?
Employees receive a stock option, but can’t exercise it because they don’t want to tie up their own capital by purchasing shares in your company, and then they want to leave.
“Now, that is a retention element, but from an HR perspective, that’s also an engagement issue,” Allen says. “You have someone who doesn’t want to work for your company anymore, who can’t afford to leave. Do you think that person is going to be pleasant to work around? The toxicity that could come from them could be dangerous, and impact the happiness and engagement of your other top-performing people.
“Golden handcuffs, yeah they achieve what you want them to do. But you’re handcuffed, and that doesn’t feel great over the long term,” Allen says.
Your company’s valuation determines price of stock options
The stock’s strike price gets based on your company’s valuation appraisal, or 409A valuation.
To determine what your company is worth, a third party looks at the Enterprise Value calculation, divided by the number and types of shares, and discounting due to lack of marketability.
Valuations can be done annually, semi-annually, quarterly, etc. ServiceTitan followed the typical evolution for a startup—annually, then semi-annually, and now quarterly. Talk to your attorney or company CFO to determine what’s best for your company.
Exercising vested stock options
Employees retain the right to exercise their vested options immediately upon vesting.
Exercising means the act of buying the options at the strike price.
Employees can exercise by paying for the stock and related tax withholding (if any), and executing the appropriate documents.
Stock option example:
Robin was granted 1,000 options at a strike price of $10 when hired.
After working for one year, she has 250 options vested.
Robin is now eligible to purchase the shares by paying the company $2,500 ($10 x 250 shares).
If the company’s value doubled since the options were granted (stock now worth $20 per share), Robin’s 250 vested shares now hold $5,000 in value.
$250 vested shares X $20 share price = $5,000
Robin’s gain equals $2,500
If the stock price goes below $10 a share, Robin can choose to not exercise her vested options.
“If I own stock options, do I as an employee get to share in the profits for the home services company? Do I have a say in the managing decisions?” Hunter advises asking an employer.
"You have some flexibility there,” Allen replies. “If you give voting rights with your shares, then yes, you are giving a voice to the people who own the shares. However, it’s likely the owner would have the majority of shares, and he gets to make the decisions.
“In terms of sharing profits, some stocks have what they call share dividends—when a company reaches a certain amount of profit, they give a dividend to their shareholders,” Allen explains. “That is a way you could distribute profits to people who own shares, but it’s optional.”
Other ways to achieve an ownership mentality
Focus short-term rewards (bonuses) on behaviors that drive long-term success. Just keep in mind, revenue (profits) is a short-term indicator of business performance. Instead focus on good-for-long-term indicators, such as:
Net Promoter Score (Do your current customers love you?)
New Customer Acquisition (Are you growing the business?)
Customer Retention (Do existing customers continuously return?)
Then, create annual bonuses for these long-term metrics and pay them in the next calendar year.
Compensation Pro Tips:
Avoid paying a well-performing employee below market value. If they deliver great results, deliver great compensation.
Nothing disengages a well-performing employee more than finding out they’re underpaid.
You lose trust in the employee/employer relationship, and it’s nearly impossible to gain that trust back.
It’s not even about the money; they feel taken advantage of or disrespected.
If you compensate people fairly and competitively, compensation won’t become an issue that distracts people on your team.
It’s cheaper in the long run to pay market-competitive salaries. Turnovers are costly (figure lost productivity plus training time).
Expect salaries in the trades to continue to go higher. The laws of supply and demand always drive salaries up.
What’s your next step for implementing an equity program?
Allen advises starting with a qualified securities attorney before taking the next step to create an equity program for your employees.
Theilmann also advises companies in the trades to beef up their HR Department when preparing to start an equity program.
“It’s a big undertaking,” Theilmann says. “The thing I would stress is simplicity. There are a billion ways you can do this. The more simple you can make it, the simpler it will be for you to manage, and it will be more interesting for your employees. It will be easier for them to understand, and make them feel more excited to act like an owner, which is really the power here.
“The more simple you can make it, the more impactful that culture becomes.”
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