Rewarding Freelancers with Micro-distributions of Equity

Sharing Ownership with the Next Generation Workforce

As 21st century companies increasingly experiment with equity, Quidli is building equity sharing tools for the next generation workforce — freelancers. Issuance across different instruments, vesting, programmable rules & restrictions, and transaction overviews are all available via our intuitive interface so you can easily provide the right skin-in-the-game to any freelancer who brings your company value.

Real Quick: Why share equity with freelancers?

Companies are constantly looking to better incentivize workers. Employees tend to get standard arrangements — salary, or salary + stock on vesting schedules. But for freelancers who aren’t necessarily worried about fixed incomes and choose to work on projects that interest them, they may be open to taking stock in client companies they believe have the potential to grow big. And for cash-strapped businesses, investments via micro-distributions of equity in exchange for work can mean significant extensions in runway.

You can refer to our previous piece on the subject for more thoughts and considerations on equity as compensation to freelancers.

Sharing Equity with Freelancers for Beginners

For companies certain they want to compensate freelancer(s) in shares, we lay out this quick primer of considerations for determining equity splits and distributing offers. While by no means comprehensive, this post can serve as a starting point for deciding how you motivate the freelancers you may work with.

We should make clear that it’s a strong connection finding a freelancer willing to accept shares in exchange for labor — this means they really believe in what you’re doing and are willing to invest via their services. As such, it’s important to commit to a plan and to reflect any adjustments fairly to all relevant parties as they occur.

So for starters, we don’t think there’s one right way to split equity. And so it’s important for a company to be upfront and transparent on any and all established “rules of the game.” Whether you set “traditional” splits — fixed percentages determined by roles, contributions, time/money spent, etc. — or apply more dynamic models tied to objectives and or performances, all stakeholders must understand the system you put in place; this will ultimately also set the tone for the type of work culture you create. And while friction due to perceived fairness is inevitable on some level, the more clear you are on vision and with setting expectations, the better alignment you can achieve.

An Equity Instrument for Freelancers

Today, most US startups use incentive stock options to reward employees with equity. This has historically been effective to incentivize longer employee tenure — Microsoft is a prime example of how employees demonstrated extreme loyalty in efforts to get their shares to vest. But the process of setting up, distributing, and benefiting from incentive stock options is complicated. And as the roads to IPO are demonstrably getting longer for many businesses, workers are increasingly ending up only “paper rich.” Hence the increasing lack of employee loyalty and high employee churn rates seen at many of the largest Bay Area startup companies today. So for freelancers open to participating in work-for-equity systems, there should be a better instrument to work for. In our opinion, this is the Restricted Stock Unit, or RSU.

Regardless of what instrument is used, it should be acknowledged that a freelancer willing to work in exchange for shares is making an investment, taking on extra risk to contribute; and so their reward should be aligned with the company’s success without having to deal with complicated financial plans to best optimize stock options (being exposed to unnecessary tax obligations when liquidity is nowhere in sight isn’t much of a reward).

Vesting Designed + Programmability for Greater Alignment

Accordingly, an RSU is a conditional promise of future equity or cash equivalent. It’s designed to convert into shares of stock or cash at a specified time or milestone. Large public companies tend to tie this conversion after a certain amount of time worked, or after certain performance goals are met. And to make this instrument more effective for smaller private companies, you can add Exit Vesting. This is ideal for the early workers who’re critical to your success, but only if they stick around. Even if they eventually leave, you want them to have an incentive to work towards long-term success, not just up until the day their shares vest.

Such exposure to financial risks is even more heightened in the case of freelancers — by receiving traditional stock options, they’d have difficult decisions to make the moment they receive an option in order to optimize their taxes. They’d have to choose whether to be taxed at the moment the option is granted, even before vesting, and if they do choose to pay taxes at that moment, they’d face the risk of paying taxes on something that may never vest or may never even be worth anything. Most people don’t understand that they need to make this decision, and even if they do, they’d need help from accountants. And it’s hard to incentivize people if they don’t understand what they’re getting. Ultimately, ease and transparency is what will help drive more alignment and incentive to perform.

Fortunately, a lot of the legal framework necessary to understand for making adjustments can be considered fairly boilerplate. Lawyers aren’t incentivized to tell you this, nor is it in their immediate interests to help design more flexible plans unless you’re willing to pay a lot more for them to deviate from their standard operations (we don’t necessarily hold this against them, it’s their business model after all!). This is why we consider an added layer of programmability on top of equity issuance and distribution as an absolutely necessary tool to meet the demands of the more fluid dynamics of tomorrow’s workforce. The future of work should be accessible in a matter of clicks, not through many hours discussing and negotiating with lawyers.

Explore how we use our own app at Quidli to incentivize and reward our team members. Want to learn more about equity tokens and how they can potentially help your company? Check out our site, follow us on Twitter, or contact us directly with any questions or comments you may have at hey@quid.li.