High Potential Startup #28: Keep Financial
Revolutionizing Compensation - Administering 'vesting cash bonuses'
At the time of publication: Seed | Total funding raised: 9mn USD
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The premium that companies are willing to pay for qualified talent has increased greatly in the last few years. As more and more work becomes 'knowledge work', the impact that any one 'superstar' can have on a company is enormous. And this is especially true for early stage startups where talent is crucial and can make or break a company.
But there is a massive scarcity of talent. Number of vacancies for high paying jobs have only increased. The wage increases have been much higher for professional jobs like software. Some data from the US below:
For top talent, the lure of a big name company is in the prestige with low risk and above average pay. For startups it has traditionally been in the promise of equity - the promise of a potential fortune down the line.
Both big companies and startups would ideally want talent to stick around for years. And the key tool used for talent 'retention' has been ESOPs or equity that vests over time.
Retaining younger employees has been an issue for decades now. For example, the median tenure of someone in the 25-34 age cohort has been roughly 3 years for the past four decades!
And in the past two decades, the time to cash out equity has increased significantly (if you ignore the bubble year of 2021) because the time for startups to exit has increased by many years.
This means there is an opportunity for another (additional) 'retention' approach - the employer gives the talent a big chunk of money upfront with the promise to stay for x number of years.
But how to enable this in reality? How can companies enforce such a contract and administer this? What about small companies who may find paying a big upfront cash a bit expensive?
Keep Financial has found a way to scalably administer a clever solution - 'vesting cash bonus'.
The vesting cash bonus is a 'forgivable loan' that ‘vests’ over time. For example, a talent can get $400,000 upfront cash as a 0% interest forgivable loan that can ‘vest’ (forgiven) over the next four years.
If the talent leaves after one year, then she is forgiven $100,000 but the remaining $300,000 has to be paid back within 60 days at 0% interest or converts to a loan with the usual interest rate. The collections are handled by Keep in such cases.
Once a vesting cash plan is created by the rewards department of the company for an employee, the employee can transfer a part or full amount to their bank ready to use after accepting the agreement.
Keep charges a fee from the employer to manage the loans. “When a loan is issued, the employer will pay Keep Financial 2.75% of the aggregate amount of bonuses issued in a given month, subject to a minimum payment of $250 per employee loan.”
The employer can fund the bonuses themselves or Keep can fund the loans (via financial service partners). If Keep is asked to fund the loans, there will be an additional cost and Keep will underwrite the company. (Keep is licensed as a lender in 46 states). I suspect smaller companies will prefer the option of funding via Keep.
Talent would love such an offering. They can for example use the cash for some personal milestone - like paying back student loans or putting a down payment on the house. Or maybe they can use it for their professional development.
Numerous surveys already note that new employees expect some form of financial assistance from employers in help towards paying down student debt.
This model can potentially be a standard benefit in the future - once companies start offering this, other companies will follow suit or will risk being left behind. There is also a sense of ongoing recognition for the employee.
And this does not have to be vesting cash (or) vesting equity but companies will very likely want to offer a mix of both. And this is great for companies too - retaining top talent is worth it from a return perspective.
The founders Kathryn Petralia and Rob Frohwein are domain experts in the financial services space and previously co-founded Kabbage (which provides financial solutions for small businesses) which was acquired by American Express.
Keep Financial can really pave the way for this new type of compensation. And there is a potential large market. For example today most ESOP participants are the ones who are employed in publicly traded companies and these make up 85% of ESOP participants (i.e. employees).
For illiquid private companies, the vesting cash model can be more attractive to some talent.
Keep Financial is a high potential startup to watch out for and can potentially revolutionize compensation. Its solution is a good fit for organizations of any size but especially smaller companies that need retention solutions the most and hence there is a large market that Keep can unlock. And the fact that it is led by proven founders with deep domain expertise makes it all the more attractive.