Report: Funding Lull Sparks Tech Firms to Raise Employee Equity

Thom Carter

07 March 2023, 03.46pm

Report: Investment Lull Sparks Firms to Raise Employee Equity

According to new research from Ledgy — the equity management platform — tech firms are planning on doubling-down on employee equity as a means to weather the current tough investment environment and encourage an ownership mentality among employees.

The State of Equity and Ownership 2023 report — which surveyed 1,200 employees, executives, and founders across the US, UK, France, and Germany — found that two-thirds (64%) of founders are aiming to make their equity plans more generous this year. Further, three times more founders spent “a lot of time” on employee equity when fundraising.

The data underscored the impact that the fundraising and valuation slowdown has had on tech companies: compared to last year, fewer founders secured external investment successfully. A majority of founders across the UK, US, France, and Germany (51%) had not raised money from investors in the previous 12 months, compared to 43% in 2022.

When it comes to the UK specifically, however, 51% of founders raised external capital in the last 12 months — its long-standing venture capital (VC) industry with greater depth and liquidity giving companies more fundraising opportunities and confidence than France and Germany.

While UK tech firms reined in more external investment than the two EU countries — but also less than the US — Ledgy’s latest research has also uncovered that 1 in 4 UK founders give 15% or less of all equity to employees.

Similarly, 1 in 3 UK companies use a tax-optimised share plan to provide employees with equity stakes. Tax-optimised plans, which require in-depth discussion with tax authorities and greater overhead for finance and legal teams, is a key indicator of the relative equity maturity in different ecosystems.

Despite the US being something of an employee equity superpower (47% of U.S. founders give 15% or less of all equity to employees, for instance) — and is followed by the UK — the data shows that EU countries are catching up as employee equity becomes more desirable in the current investment climate.

Ledgy’s co-founder and CEO, Yoko Spirig, commented on the report, saying: “Despite the tech ecosystem coming back down to earth over the past year, there is still an enormous amount of innovation happening and equity trends are moving in the right direction. Tech firms are doubling down on equity because they recognise that incentivising talent with a stake in the business is one of the best levers to align everyone behind the mission and vision through tougher times.

“Equity in Europe used to be a case of maybe getting a decent chunk of share options in a London startup, and not much on offer elsewhere. Our data shows that this is no longer the case. Although there is more to do, we are now seeing startups in markets like France and Germany establishing progressive equity plans that could give employees transformative ownership in leading companies.

“But Europe is still lagging behind the United States on critical metrics like how widely equity is distributed across the team, and how much of the company’s equity is allocated to employees. We have seen some positive grassroots campaigns trying to change things in Europe, but more government support and cross-jurisdiction standardization of share option plans is needed to make equity in Europe as exciting and well-understood as equity in the US.

“Taking the temperature of equity and ownership across four important markets has been a fascinating exercise and we are already excited to see how the tech sector evolves in the next 12 months.”