This is the first article in a three-part series on the benefits of giving all startup employees equity. The next article will explore the opportunity Chicago has to leverage equity to create more founders and people capable of taking risks on very early-stage companies.
Last month, Chicago Inno published an article on why some startups choose to bootstrap rather than raise venture capital. Although I work for a venture capital group and spent most of my career working in startups that have raised venture capital, I’ve also worked in a startup that bootstrapped. Each strategy for scaling has its own benefits and compromises, and either mode of operation can be an excellent choice for a company, depending on the business’ dynamics and goals.
Not debating the merits of either funding approach, something that stood out to me in the article was this line: “Venture capital can do many things for a startup … But what does it take away from startups and their founders? Board seats, autonomy and equity, which has an impact on the amount of cash founders take home when their startup is acquired or goes public.”
This sentence highlights the emphasis that we in Chicago place on the importance of equity and its benefits to founders, as opposed to extending those benefits to a startup’s employees—especially early employees who took a lot of risk on an unproven company.
Having worked in startups in a variety of ecosystems including Ann Arbor, Boston, Seattle, and San Francisco, something that surprised me when I moved to Chicago is that our ecosystem as a whole seems to be less vocal about and less generous with employee equity, relative to what I’ve experienced in others. Every startup I’ve worked for has offered every single employee equity, and that wasn’t because I only selected startups that made equity offers; rather, offering employee equity was the broader expectation, not the exception, in those startup ecosystems.
The reality is that the mature startup ecosystems that Chicago competes with from a talent and capital perspective do offer their employees equity—and that equity is usually granted to all employees, regardless of their role or level.
According to Option Impact—which is the only comprehensive compensation database of VC-backed, privately-held organizations—66% of U.S. startups offer equity to every single employee, whereas 34% give equity only in certain roles or levels. In the Bay Area, those numbers are 71% and 29%, respectively. On a national scale—in both tech and non-tech startups—it’s not until after companies hit unicorn status that giving equity to all employees becomes the exception rather than the norm.
While it’s impossible to know what all of Chicago startups’ equity packages look like or whether they offer all employees equity, it is possible to understand whether our startups are benchmarking their equity offers against each other and those of the broader national market. Unfortunately, it’s impossible to tell where Chicago falls exactly, because not enough local companies are participating in the Option Impact system.
To better understand how Chicago leverages the Option Impact compensation data relative to other ecosystems, I talked with Conrad Lee, who oversees the organization’s compensation and data strategy. According to Lee, the Bay Area startup ecosystem tracks comprehensive compensation data 24 times more than Chicago, while PitchBook reports that the Bay has just 7 times the number of startups. New York benchmarks their comprehensive compensation data 7.2 times more than Chicago, while PitchBook reports that they have 3.7 times the number of startups as us. Boston tracks the data nearly 5 times more than Chicago, despite PitchBook’s report that Boston has 2 times the number of startups. Seattle tracks the data 2.7 times more, while PitchBook says we have roughly the same number of startups.
In fact, the number of Chicago startups that track how their total compensation compares to the broader market is roughly the same as the number of startups that do so in the entire state of Utah. And notably, of Utah’s startup ecosystem, nearly half are benchmarking themselves on comprehensive compensation packages. My theories on why: (1) Utah receives a lot of coastal VC and replicates broader market trends, and (2) Utah recognizes that it has more to lose than other ecosystems if its compensation offers don’t compete with those market trends.
For an emerging ecosystem to compete against more mature tech hubs, it needs to track itself against the market’s equity best practices. Obviously, I’m not suggesting that Chicago needs to follow the exact Silicon Valley, Boston or Seattle playbook. But it will be extremely difficult to recruit external talent—something that will be critical to accelerating growth—if we’re not on par with or competitive against the equity benefits that talent sees and expects elsewhere.
Why Chicago seems less vocal about equity has been a burning question for me that I’ve been trying to better understand over the last couple of years as I’ve met more Chicago startup founders, investors and employees. When I share this observation and ask why we as an ecosystem don’t offer employee equity as a general rule, the most common responses I’ve heard are: “We don’t need to; folks here don’t expect it,” “Employees don’t understand its value, so it’s not worth giving it to them,” and “Most employees wouldn’t become rich anyway, so there’s no point.”
While equity shouldn’t be the reason someone joins a startup, and it’s not likely to make the majority of a startup’s employees full-blown wealthy, it can be a really powerful tool. Equity creates opportunity, and I believe that our tendency in Chicago to limit equity’s reach stands in the way of achieving our ecosystem’s larger goals—both in terms of short-term talent acquisition and retention, as well as in long-term initiatives like P33.
As mentioned above, when I started anecdotally researching how Chicagoans approach equity, I often heard people say employees here don’t expect equity and that because founders aren’t required to offer it, they don’t. Meanwhile, initiatives like P33 have been formed to specifically address the talent and innovation gaps that Chicago faces. I argue that these are two different sides of the same coin.
Certainly Chicago is challenged by the fact that much of our industry is B2B and, therefore, the brands that we build—and thus our innovation ecosystem—aren’t as widely known among consumers. That is a challenge that will take time to overcome, but there are challenges that we can address today, particularly when it comes to how we attract and retain talent.
The wide innovation and talent gaps that Chicago faces won’t be filled by convincing folks who work locally at Blue Cross Blue Shield or Chase Bank to come work for a healthtech or fintech startup instead. Rather, they’ll be filled by giving the best and brightest thinkers coming out of the area’s remarkable swath of universities job offers that compete with the ones they receive from startups on the coasts. This means including equity in compensation. Will our salaries be the same as coastal salaries? No. But neither is our cost of living.
This is where Chicago has a key advantage over other ecosystems. Folks who cut their teeth on the coasts, want to settle down, and are tired of living month-to-month on a six-figure salary have opportunities in Chicago. Here they can save money, live a less financially-constrained lifestyle, and even own homes in a city that boasts great mass transit, a thriving arts and entertainment scene and plenty of outdoor recreation. But these folks will quickly be disillusioned by recruiters who ask them if they’d like equity as part of their compensation package (two-thirds or more of them expect it) or, worse, by receiving employment offers that don’t mention equity at all.
To an experienced startup veteran interviewing from outside of Chicago, a job offer that doesn’t include competitive equity benefits suggests that our market is misaligned with or uninformed of broader industry norms. This adds fuel to a fire that we as an ecosystem continually try to extinguish—the perception that the Midwest is not a mature tech market.
One of the most valuable tools for understanding the full breadth of market compensation among venture-backed private companies is, again, Option Impact. Thousands of startups globally report their compensation packages in Option Impact, which has created a robust database that takes into account factors like region, company size, revenue, funding stage, and employee level.
Chicago has a wide open opportunity to better understand what other ecosystems offer in terms of equity (not just salary) and whether our startups are, become, or remain competitive compensation-wise. It is completely free for startups to benchmark themselves against the market. And the more that folks benchmark themselves, the more reliable the data will become.
At the most basic level, opening the black box of startup equity and shining some light inside it is the first step we can take to better understand the full spectrum of how we compensate startup employees in our own ecosystem. And venture capital groups like ours at HPA can support our portfolio companies in doing this by raising the issue and supplying the tools to open that box.
Originally featured in American Inno.