Why Liquidity Matters

Employee retention looms as a white whale in tech today as top talent migrates to new opportunities. Retention can be vital to startup success, particularly when retaining leaders in charge of critical systems. When expert knowledge walks out the door, companies face business continuity problems and high hiring costs. These issues compound when financial incentives at private companies are insufficient to keep key talent engaged. 

Blind respondents at permissive companies rated the fairness of liquidity policies at an average of 3.64/5, compared to 2.67/5 for their peers at non-permissive companies. Liquidity can be a source of controversy. Some companies enable different groups to take advantage of their equity differently, including approving preferred stock transfers but blocking common shareholders. To avoid this, other companies may avoid liquidity altogether, blocking all transfers in pursuit of fairness. Our survey result suggests that employees perceive liquidity for all as fairer than blocking it. While there may always be edge cases that necessitate blocking transactions, creating predictable conditions for approved transactions on a transparent platform like Hiive’s can create a perception of fairness, strengthening loyalty to the company.

When workers don’t value their equity compensation, they are less likely to stay. If workers only cared about current or future cash compensation, we would expect future plans to be similar between permissive and non-permissive companies. Contrary to conventional wisdom that the non-permissive 'golden handcuffs' approach leads to better retention, only 27% of respondents at non-permissive employers who responded to our survey plan to stay as long as they can, compared to 43% at permissive companies. Employees at non-permissive companies more commonly report looking elsewhere than planning to stay, while permissive companies keep employees focused on their current work. This data suggests that companies denying workers the ability to sell their stock invite them to look elsewhere, undermining retention efforts instead of enhancing them.

Promises of future exits can’t be trusted in today’s private markets. Tech company recruiting has long hinged on the promise of exits realizing equity value. Going back to the 2000s, non-founding startup employees could expect an IPO or M&A event around 3-5 years after joining at an early stage, letting them participate in the success of the company before moving on to other opportunities. The median age of a tech IPO in 2000 was five years, and remained below 10 years until 2007. Workers could wait for these natural liquidity events, with the reasonable expectation that the value of their shares would be more than they could gain from employment at big companies. Equity compensation structure has remained essentially the same even as startup economics have changed. This deal that startups made with their stakeholders faces pressure from a less receptive public market and a chilled M&A landscape.

Achieving liquidity can contribute to a more positive attitude about career growth. Blind respondents rated their career growth 2.48/5 at permissive employers and 1.95/5 for non-permissive. This difference shows that allowing secondary sales can elevate a worker’s view of their own career progress and potential. Further, it shows that the carrot of a significant exit outcome in the future doesn’t directly translate to an individual’s perception of their own career trajectory. A holistic employee-centered career growth strategy likely includes the ability to make decisions about financial rewards.

In a competitive labor market, liquidity changes workers’ perceptions about the value of their equity grants. The overall trend in equity compensation points down, with public companies decreasing the stock-based compensation they are willing to hand out to new hires (2). This trend comes with pressure from public market investors to minimize hidden expenditures and pursue profitability. 

Of those who receive equity, permissive company employees rate the relative value of their equity grant at 3.73/5, compared to 2.35/5 at non-permissive employers. With less equity to go around in tech, specialist workers privilege those employers who can grant outsized equity packages, allowing them to monetize those packages over time. 

Our qualitative survey of stock sellers on Hiive finds that workers at top AI startups pursue share sales because of the value they have created. Other reasons we asked about include simple portfolio diversification or a desire to sell stock upon resignation. The ability to realize value is especially crucial for workers planning major life events, such as purchasing a home or starting a family, while also prioritizing the mission of startups they want to work for.

Alignment between employers and employees can boost net promoter scores, showing cultural health. Net promoter scores show employees’ morale and willingness to signal happiness with their company. In our survey, private company employees at permissive companies scored their likelihood to recommend their company to their network at 2.77/5, while those at non-permissive companies scored their employers at 2.20/5. This gap suggests that companies offering liquidity can enhance employees’ opinions of their workplace, bolstering recruiting efforts at a difficult time to attract top talent. When workers know they will be tangibly rewarded on a predictable schedule, they build tighter bonds with colleagues and become more receptive to leadership messages.