How Market Turbulence of the Last 3 Years Has Changed Equity Plan Design

Both public and private companies are reducing the total value of new hire equity grants

Over the last few years, companies across the board—both private and public—reduced the total value of new hire equity grants.

In the midst of a bear market, this makes sense. The market downturn in 2021 and 2022 led to depressed stock prices which meant equity grants sent equity burn sky high.  

And, while the downturn impacted both public and private companies (and resulted in both company types reducing total equity grant value), public companies are responding creatively so that under the public eye, their value and incentives for employees continue to be attractive. 

Specifically, they’re experimenting with new ways of managing equity like shortening vesting schedules, accelerating vesting, and removing cliffs, to protect annual incentives for employees. 

Private companies, on the other hand, are generally following the trends of their peers and sticking to traditional equity practices, like 4-year vesting schedules, 1-year cliffs, and linear vesting structures. 

In this article, we’ll explore how public and private companies are managing equity so that early-stage private companies can validate their approaches (which have largely remained unchanged) and late-stage private companies can earmark the trends of public companies to stay competitive.

Aside from reducing the value of equity grants, there are a few actions that companies can take to reduce equity burn. Companies might: 

• Change vesting schedule levers (e.g., shorten the duration)

• Limit equity eligibility for new hire grants 

• Limit equity eligibility for refresh grants and/or change refresh programs

Below are the trends we’re seeing in vesting schedule levers from real-time data across 7,500 companies in Pave’s platform. Pave and NASPP will be sharing more trends on equity eligibility in Q3.  

Public and private company equity practices in 2024 YTD

      1. The rise of the 3-year new hire grant at public companies 

The 3-year vesting schedule has become increasingly popular with public companies. Interestingly, we haven't seen the same shift in the private sector—yet. The 4 year grant is still prevailing across more than 90% of private companies’ plans.

Why this might be happening: A shorter vesting schedule helps companies maintain the annualized value to employees while still reducing company burn and dilution. 

      2. Cliffs are starting to disappear at public companies

More and more public companies are starting to drop cliffs. This year, the number of public companies that did not have a cliff for new hire grants was the highest it’s been in the last four years.

Most private companies (about 90%) are still opting for a one-year cliff.

      3. Backweight, accelerate, or keep it simple

Public companies are getting creative with how they’re structuring their new hire vesting, while private companies have kept things traditional. Accelerated vesting has been fairly popular for public companies and, this year, there was an uptick in backweighted vesting.

Why this might be happening: Backweighted vesting encourages retention and protects net equity burn, while accelerated vesting gives more immediate gratification and incentive to employees for short term retention and engagement. 

Public companies are taking new approaches to manage equity. Should private companies follow suit? 

While both public and private companies are reducing the value of new hire equity grants, public companies are leading the way in altering other levers in plan design. Private companies, on the other hand, have not had an immediate need to change. But with public companies shortening vesting schedules, accelerating vesting, removing cliffs and, shall we mention.. having liquidity…the question begs: should private companies follow suit? In mimicking some of these practices, there could be opportunities to attract more candidates. 

If you’re a private company, we recommend keeping an eye on the trends of public companies—their larger shifts in equity approaches could be worth a second look to help you differentiate your strategy to earn top talent. 

For more reliable, real-time insights on compensation benchmarks and equity data, request a demo of Pave. 

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