The Culture of Equity: Stock Compensation in Startups & how NOT to underestimate the in-laws! - Valerie Rozycki, ZipDial

Given that the team at my startup ZipDial often feels like family, I do not at all object to the idea of receiving phone calls from my colleagues’ relatives. However, I was more than slightly surprised the first time I was questioned by a prospective father-in-law of one of our engineers, who requested (highly confidential) information about the company’s valuation in our recent investment round.As an American-born, Indian-bred entrepreneur who even after three years is still familiarizing herself with the nuances of India, this experience taught me about the strong influence of families in career decision-making—as well as to not disregard the prospective in-laws!

Of equal importance is the fact that compensation is thought of very differently in India and in the US, especially when it comes to stock options. Employees at startups in India often either simply don’t ask for them or don’t ask for enough.

Investors and promoters in India also have very different standards for what is fair in issuing of ESOPs to employees as compared to their US counterparts. Even employees within startups who have stock options often don’t fully understand their value or how they work. These are observations I’ve made time and again.

Educating the market

My co-founders and I strongly believe in an employee-friendly approach ensures not only that every member of the team has ownership and partakes in the company’s success, but also proactively educates the team about how stock options work and what impact they can have on overall income.

I believe it is important for all employees of startups to have stock options as part of their compensation packages. The exact level of ownership that is fair and appropriate will of course vary greatly depending on the role and responsibility of the employee as well as the stage of the company.

Regardless of level of ownership, more important than being the right thing to do for employees, this is the right thing to do for the company. Entrepreneurship is not a sprint by one person; it is a long-distance rowing race where all teammates must be in sync. Giving team members ownership in the company gives them long-term motivation as owners, further aligning their interests with the leaders of the venture.

India has relatively high turnover rates of employees as compared to other countries. This is especially true among younger employees who often are most likely to have the energy and risk appetite to join a startup. Giving stock options to employees helps reinforce the long-term objectives of the company and the long-term commitment that the company has to every employee.

Furthermore, it is equally important for startup leaders to educate employees about the value of stock options and the mechanics of how they work. I have been surprised in startup networking events to occasionally meet aspiring entrepreneurs who plan to build companies, but know very little about how equity ownership actually works.

Without fully understanding the mechanics and value of equity, the motivational purpose of stock options can be lost; there are many nuances to structuring equity agreements, and both sides must be careful to ensure that employee equity agreements provide the right incentives to align incentives for long-term value creation. It benefits not only employees, but also the company and its leaders to ensure the team is well-educated.

Buyer Beware

An important part of educating potential or existing employees about stock options is to understand the risks. If we all didn’t believe our startups were going to be the next Google, we wouldn’t do them. But we have to remember that by its very nature, the value of equity could amount to zero.

The accompanying graph summarizes my atypical and fairly adventurous career path in terms of compensation. No, the graph is not mistakenly turned 90 degrees clockwise. And no, I was not bonked on the head or brainwashed in the moments finalizing my career decisions.

As you can see, my salary compensation has gone from higher than average compared to my cohort to, well, zero. Perhaps I’m lucky I did not show this graph to my potential in-laws before my fiancé and I decided to get married.

While my level of ownership in each company is inversely proportional to my downward spiral of guaranteed income, I, like other entrepreneurs, have to be comfortable with this risk equation. Similarly, all startup employees deserve to be adequately informed about stock options as a component of compensation so that they (and their families) are comfortable with their own risks.

A new generation of success stories

One of the most important factors in creating awareness about salary versus stock options is largely out of the control of any individual startup leader. Instead, we must rely on other success stories in the market. The good folks at MakeMyTrip and other Indian startup successes help create awareness about the merits of stock options for our employees and their in-laws.

I wish all the best to my teammates at ZipDial, and fellow entrepreneurs working hard to create even more of those success stories!

To validate (or invalidate) my observations, please, dear reader, share your opinion by ZipDialing (or dialing a missed call): 080 300 500 53

It’s free and simple, and I’ll reveal the results to this three-question poll in next week’s column. ZipDial the poll number, and the first question will come back by SMS. ZipDial your response based on the options, and you’ll get the second question back by SMS, etc.

This is a guest column by Valerie Rozycki, the CEO & founder of ZipDial, an interactive mobile-based platform for marketing and customer relationships management. A post-graduate in Economic Sociology from Stanford University, Valerie comes in with valuable cross-disciplinary and multi-cultural experience with stints in organizations like Goldman Sachs, Ning and eBay.

Having recognized the potential of the Indian market early on, she moved to India to head strategic initiatives at mChek and turned entrepreneur with ZipDial. Through this series of columns, she will be sharing with YourStory readers her experiences, observations and insights about startups, entrepreneurship and business ideas.

You can also share with us your thoughts and views on this story by writing to us at [email protected].