Colleen Werner is the Founder + CEO of lulafit, a company transforming office buildings with amenity consulting and management.
In the entrepreneurial world, I find that few tools are as powerful for both growth and retention as equity.
While some founders may hesitate to part with equity they aren’t getting cash for, strategic equity distribution can be one of the most effective ways to align incentives, build wealth for employees and create a culture of ownership.
As someone who has bootstrapped and stretched capital in every possible way, I’ve come to rely on what I call “sweat equity.” By granting equity to employees, I’ve been able to attract top talent while ensuring that our incentives are fully aligned.
Why Equity Matters
Giving equity to employees achieves three critical objectives:
• Incentive Alignment: Employees perform better when they have a direct stake in the company’s success.
• Wealth Creation: Unlike traditional salary increases, equity can provide exponential financial growth.
• Owner Mindset: Employees think and act like owners when they are actual owners, leading to better decision-making and long-term commitment.
Making It Work: A Guide For Employers
For equity to be an effective tool, employers must structure it thoughtfully.
The first step is to establish a Class B Option Pool to ensure employees can participate in equity without impacting controlling shares. A well-defined vesting schedule should also be set up, typically allowing equity to vest over a fixed period of time. This ensures employees remain committed before gaining ownership.
Managing expectations is crucial. Like any investment, equity carries risk, and employees should understand that outcomes are uncertain. Employers must communicate that equity is not a guaranteed payout but an opportunity that grows with the company’s success.
To reinforce the value of equity, I urge you to track performance against the market. Demonstrating strong growth relative to benchmarks like the S&P 500 can serve as a compelling retention and recruitment tool. For example, our company has achieved a 66% compound annual growth rate (CAGR) compared to the S&P 500’s 15% CAGR over the past five years.
Finally, and maybe most importantly, as an employer, you must sell the dream. Employees rarely get opportunities to directly influence their long-term financial futures through their work. Equity provides a rare chance to beat the market and shape their own success by contributing to a company they help grow.
Who Should Get Equity And When?
At our company, almost all roles are equity eligible. Employees must meet certain performance thresholds before earning their first grant. Performance-based eligibility ensures that employees receive a “meeting” or “above” expectations rating on three consecutive performance reviews (three quarters) before earning their first grant.
For leadership roles, VP-level and above employees may receive equity as part of their initial offer. This helps secure top executive talent who can drive long-term value.
Top performers—not just those with the highest titles—have the most opportunities to earn additional equity. I think this reinforces a pay-for-performance culture, ensuring that those who deliver results benefit the most. This structure also helps avoid the common trap of rewarding hard work without results. Working hard is the expectation; delivering results is what earns rewards.
What To Ask: A Guide For Employees
For employees considering an equity package, it’s crucial to understand the underlying financial structure of the business. Some good questions to ask:
• Do investors have preferential treatment, meaning they get paid before employees in a liquidity event?
• Is there existing debt? What are the future fundraising plans, and how will they impact equity dilution?
• How much equity has already been granted, and how much remains available?
• What is the current strike price, and how has it changed over the past 12 to 24 months?
• Are there pathways to increase equity over time based on performance?
• What are the possible exit scenarios, and what would they mean for employees’ equity value?
Equity In Smaller Companies Versus Large Corporations
Equity in a high-growth startup that isn’t diluting its ownership through constant fundraising can be a more effective wealth-building tool than equity in a heavily diluted, venture-backed company.
Employees should evaluate where they invest their time just as carefully as they would assess financial investments. If the company’s equity isn’t seen as valuable, it’s worth reconsidering whether your time is well spent.
Overall, I find that equity is one of the most powerful tools for building and retaining a high-performing team. When structured thoughtfully, it provides employees with meaningful financial upside while reinforcing a shared commitment to the company’s success.
If you have the opportunity to invest your time and effort into a company that values equity, take it seriously. It could be the best financial decision you ever make.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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