If you’ve ever taken a startup job, the promise of equity may have reeled you in. But the popular incentive can also be seriously risky--some 92% of startup employees report taking a personal financial risk to buy their stock options, and more workers say they value being educated about stock options (87%) than the options themselves (78%).
The San Francisco-based enterprise began testing live classes with about two dozen companies in early 2022, and it even built a team dedicated to shaping the curriculum. Secfi officially launched the classes this month, making them available to startups of all shapes and sizes--though the company said most demand comes from later-stage startups approaching an exit, because an upcoming fundraising event or intial public offering often triggers a flood of questions about what to do with stock options. Secfi works with the startups directly to customize the curriculum they'll teach employees, with topics range from a basic introduction to planning for complex tax bills. (Secfi said the cost of the program varies, based on types of classes taught and other factors.)
“Employees are approaching their management teams much more frequently now about this topic than they were before,” Mow Kofol, who joined Secfi as its head of business development in January and oversees the company’s amped-up educational offerings, told The Org.
For Kofol, equity is both a passion and a profession. The New York-based executive spent the first few years of his career at investment banks including now-defunct Bear Stearns before jumping to the startup world. In 2011, a few years into his career pivot, he took a COO job at a consultancy called Accordion Partners, and he received a 5% equity stake as part of his compensation package. Kofol said his banking background made it easy for him to understand the finer points of his ownership stake--but for many startup employees, that’s far from the case.
What is equity?
At its core, equity equals ownership of an organization. Startup employees are often given equity grants as part of their compensation package, and they can be a powerful recruitment tool. In theory, as a private company grows in valuation, the stakes employees have in the company could grow to be worth an increasingly hefty sum.
“It's really meant as an incentive to tie people into the business; it's meant to encourage people to work hard to build the equity,” Kofol said. “From a compensation perspective, it can be very attractive for somebody to say, ‘I have this nugget now that might be worth $100,000 now, but if my company does really well, it could be worth $1 million.’”
The size of the equity stake often depends on a number of factors, including timing and seniority of the role. Very early employees, founders or critical executives can have as much as 5% or 10% stakes, but Kofol said as more investors jump aboard and the startup grows its workforce, equity grants for average employees can sink to half a percent or lower.
Secfi's Mow Kofol is overseeing the company's new education program, dubbed "Secfi for Startups." (Photo courtesy of Secfi)
Key equity terms to know
Equity is often described in terms of “options”--which refer to the option that employees have to buy their shares of a company at a predetermined price, called the strike price. This strike price is set around the time the employee joins the company, and is in theory lower than what the equity will be worth in the future. Thus, if a worker chooses to buy (or “exercise”) their equity options in the future, they could pocket the difference between the strike price and the exercise price--after taxes, of course.
Vesting is another important facet of equity. Equity grants typically vest over a four-year period, meaning that the full value of the stake isn’t exercisable until that time is up. Many companies also require that an employee work at the company for a set period of time, usually one year, before they are eligible to begin receiving any equity at all.
Common equity misconceptions
What are the biggest questions that equity holders have? “There's often a lack of understanding as to what people have to do in order to buy into their equity,” Kofol said. The process can be costly, and it comes with important tax ramifications.
“Without proper education, I think people think, ‘oh, my strike price is $1 and I have 10,000 shares, so I'm going to pay $10,000 to exercise my shares,’” he explained. “But what they don't realize is that when you exercise your options, it's counted as income to you.”
When someone exercises options, it typically counts as a taxable event. A person can face a higher income tax bill if the cash earned from exercising options pushes them into a higher tax bracket. Short- or long-term capital gains taxes are also possible, depending on the type of stock options an employee owns. For some, these bills can come as a surprise.
Equity startup rivals
Secfi stands among a handful of startups angling to make the confusing financial incentive easier to understand and manage. Competitors include EquityBee, a Palo Alto-based operation that’s raised about $80 million so far, and San Francisco-based Quid, which raised roughly $105 million in funding before getting acquired by market intelligence firm Netbase in 2020, per fundraising data from PitchBook. Secfi has pocketed about $700 million from backers including Serengeti Asset Management, PitchBook data shows. Its most recent round was a $150 million investment facility from Serengeti, according to Crunchbase.
Secfi’s business model is primarily based on contracting directly with employees, including those from buzzy startups like DoorDash and Plaid. Its services include tax-modeling tools and financing options for employees who want to exercise their options before a major liquidity event, like an IPO or acquisition. Secfi makes money by charging these employee customers a fee on most transactions.
It seems to be working. The company said it’s seen business double over the past 12 months. Its coffers are currently stuffed with about $1.3 billion available to deploy to customers, up from $700 million in March 2021. Secfi also manages more than $25 billion in employee equity today, up from about $10 billion a year ago.
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