As we’ve covered throughout our executive compensation series, equity is a major component of executive pay, especially for cash-conscious startups looking to win over top leaders. As companies grow and evolve, they begin awarding additional equity, known as equity refresh grants, to execs who’ve supported that growth.
Just like the initial equity award, the timing, structure, and the amount of equity refreshes isn’t one-size-fits-all. To maximize their impact, companies need to understand how to offer refreshes that satisfy and motivate executives while remaining affordable.
In this article, we’ll break down the essentials of equity refresh grants, why they matter, and considerations through different company valuation stages. Whether you’re just beginning to scale or preparing for an IPO, understanding how and when to refresh equity grants can make all the difference.
Why Do Companies Award Equity Refresh Grants?
Equity grants — ownership in a company usually in the form of stock options, restricted stock units, or other securities — are typically awarded at the time of hire and vest over time. (Stock options are the most common for small to mid-size companies.) They’re important tools for hiring, retention, and keeping an executive’s goals aligned with their company’s.
Equity refreshes are additional equity grants that are awarded after initial equity awards. Refreshes are intended to reward performance, keep the company’s compensation competitive with other employers, and keep executives motivated with unvested equity ahead of them.
General Considerations for Refreshes
Refresh strategies are based on a combination of company age, size, location, series, invested capital, and valuation. Although equity grants vary by company, there are a couple general guidelines to consider:
- Flexibility with structure: Design your equity strategy to offer enough structure to ensure fairness, but maintain flexibility to tailor rewards to individual contributions and needs.
- Strategic equity allocation: Use market data as a foundation for determining equity amounts, but also create room for the flexibility noted above. Be sure to have a clear process to avoid giving equity away haphazardly.
Considerations By Valuation
As your company’s valuation grows, your strategy for equity refreshes must shift. Here are key considerations for equity refreshes based on different valuation sizes and the typical funding stages associated with them, plus data from Sequoia 2024 Compensation Practices Report.
Valuation: $200 million — pre-seed, seed, Series A, some Series B
Usually, companies at this valuation haven’t been around long enough to need a formal refresh program. Refreshes are awarded with an ad hoc approach triggered by situations like:
- An employee who has vested a certain percentage of their grants
- A new funding round
- A product launch
- Clinical trial advancement
At this stage, companies are often grappling with whether to award equity based on tenure or performance, with a tendency to lean toward tenure because there isn’t a well-defined performance management process in place yet.
This is a time to establish clear processes and guidelines for eligibility, frequency, and grant size through competitive benchmarking. Focus on determining the right refresh cadence and managing the dynamics of working with the board and investors.
Valuation: $200 million to $750 millions — Big Series B through D
Although you may have hoped to have a steady process by this stage, you may still be trying to figure things out. But the pressure to have a well-defined structure and cadence is more urgent as milestones that warrant a refresh might be approaching. And you’re likely recruiting from established companies that have their program ironed out, so those employees have expectations.
If you didn’t do it earlier, market benchmarking will be necessary to ensure executive equity awards are competitive. The results could lead to awarding true-up grants, which bring equity awards up to the market rate.
If you’re a founder-led organization, this may be the first time you’re paying real attention to executive compensation. If you’re new to the compensation process, consider getting support from a third party. Not only can they help you design a comp and equity strategy, but they can also guide you on how to work with the boards who may be putting more pressure on you to produce equity usage projections for up to two years or until the next fund raise.
Valuation: $750 million to $1 billion+ — Series C+ to IPO
At this stage, there are tighter constraints around your equity pool and how much equity you’re using each year. It’s about optimizing your equity plan and becoming more efficient than in the previous stages.
The big question now is: How do you grow your business when what once seemed like an unlimited resource — equity — is now much more limited?
You might also be facing an international expansion, requiring you to figure out how to align your pay philosophy with different markets. This phase is less about one-off decisions and more about taking a strategic approach.
Your prediction model outlining all equity needs over months or years for the board must be more defined than in the previous stage, making sure you look appealing at IPO.
To figure out executive refresh amounts, look at market comparisons to companies preparing for or have recently completed an IPO. You also want market data more focused on the annual award magnitude rather than total holdings.
Evolving Your Equity Strategy for Long-Term Growth
Equity refreshes are an important part of maintaining a competitive compensation strategy as your company grows from early stage to pre-IPO. By setting clear processes, aligning with market benchmarks, and strategically managing your equity pool, you can ensure your equity remains a powerful tool for attracting and retaining talent.
Read the rest of the series:
Executive Compensation 101: Fundamentals for Planning
Executive Compensation 101: Common Mistakes & Best Practices
Executive Compensation 101: Nailing Equity
How Sequoia Can Help
No matter how big your company or what stage you’re in, Sequoia can help you create a strategic compensation plan that supports both your employees and your company goals. Reach out to an advisor to learn more.
