Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Using Rolling Dividends to Retain Talent
Transcript
- Lucas: So on today's date, July 22nd, 2026, we're seeing something strange in the startup compensation playbook. It's not equity. It's not a signing bonus. It's rolling dividends — paid to employees before the company has any revenue. Luna: Dividends? For employees at a pre-revenue startup? That sounds like something only a handful of cash-rich deeptech companies could pull off. Lucas: You'd think so. But according to a recent survey by Securitize — the tokenization platform — about 12 percent of Series A startups now offer some form of dividend-like distribution to a subset of employees. Typically senior engineers or founding team members who've been at the company for at least three years. Luna: Wait, so they're paying cash dividends on equity that hasn't vested? Or is it on restricted stock units? Lucas: It's on a notional equity grant that's structured as a phantom stock plan. The employee gets a quarterly dividend, like 0.5 percent of the notional value of their grant, paid in cash. The company treats it as a compensation expense, not a dividend distribution, for tax purposes. But the employee gets a cash check every quarter. It's a retention mechanism. Luna: So the employee is essentially getting a cash return on their 'paper value' before a liquidity event. That's a powerful incentive to stay. But how do you even determine the notional value for a private company? Lucas: That's where it gets tricky. Most companies that do this use 409A valuations — the same independent appraisals used for option pricing. They update the notional value every quarter and pay the dividend based on that. One example is a late-stage deeptech startup called QuantumScape. They're actually public now, but when they were private, they experimented with a rolling dividend for their core battery scientists. They paid a 0.5 percent quarterly dividend on a notional grant. It locked in key talent during a critical R&D phase. Luna: QuantumScape is a solid example. But they had a lot of venture backing and a clear path to public markets. What about a typical Series A startup burning $500,000 a month? Can they really afford to pay cash dividends? Lucas: For most, no. But the structure can be flexible. Some companies offer the dividend in the form of additional equity — a 'stock dividend' — which doesn't require cash. Others tie the dividend to a specific milestone, like a product launch or a revenue target. The idea is to create a recurring incentive that's more tangible than a promise of a future exit. Luna: It does feel like the market is demanding more tangible retention tools. We talked about rolling SAFEs and rolling no-cap notes in prior episodes. This seems like another variation on that theme of continuous, recurring incentives. But I worry about the tax implications. If the IRS sees this as a dividend on stock, you might be creating a taxable event for employees every quarter. Lucas: Right. Under current IRS guidance, if it's structured as a compensatory payment, it's ordinary income. The company withholds taxes. But if it's classified as a true dividend on actual equity, it could be subject to capital gains treatment. Most startups err on the side of calling it compensation. Still, it's an evolving area. The IRS hasn't issued specific guidance on 'rolling dividends' for pre-revenue companies. So there's some risk. Luna: And there's another risk: if you give dividends to some employees but not others, you could create a two-tier workforce. The 'preferred' employees who get dividends vs. everyone else. That could hurt culture. Lucas: Absolutely. Most companies limit it to a small group — typically the first ten hires or the core technical team. But you're right, it's a delicate balance. If you expand it too broadly, the cash burn becomes unsustainable. If you keep it too narrow, you risk internal resentment. Luna: Let me ask you this: is this trend actually growing, or is it just a few high-profile experiments? Because I haven't seen many pitch decks with a 'rolling dividend' slide. Lucas: It's still niche. But the Securitize survey data from June 2026 shows that 12 percent of Series A companies offer some form of dividend-like distribution. That's up from about 3 percent in 2024. So it's doubling. And it's concentrated in sectors where talent is scarce — AI, biotech, deeptech. Companies are trying everything to retain people because the public markets are volatile. Look at the ARKK Innovation ETF: it's down 2.4 percent over the past five days. High-growth stocks like Palantir and Airbnb are also under pressure. If your equity compensation is tied to a public market that's shaky, a cash dividend every quarter starts to look very attractive. Luna: That's a great point. The rolling dividend is a hedge against public market uncertainty. If your paper wealth isn't growing, at least you get some cash. But let's talk about the downside for the company. You're essentially committing to a recurring cash expense before you have revenue. That could scare off investors who want you to conserve cash. Lucas: It can. But some venture investors actually like it because it signals that the company is prioritizing retention. And if the dividends are structured as equity rather than cash, it's not a drain on the bank account. I've seen a few convertible note structures where the dividend is paid in additional principal on the note. That's a creative way to avoid cash outflows. Luna: So rolling dividends are basically a tool for companies that need to lock in key technical talent during a long development cycle. And they're most common in deeptech, biotech, and AI — sectors with high burn rates and long paths to revenue. Lucas: Exactly. And it's worth noting that this isn't just for startups. Some public companies have used similar structures, like 'tracking stock' for specific divisions. But in the startup world, it's a response to a specific problem: how do you keep a founding engineer who has a $2 million paper value on their options but no liquidity and no confidence that the exit will happen in the next five years? Luna: And the rolling dividend gives them a reason to stay. They get a little cash each quarter, and they get to keep accumulating equity. It's almost like a guaranteed bonus, but tied to the company's valuation growth. Lucas: Right. And if the company's valuation goes up, the dividend amount goes up. So it's a direct incentive to increase the company's value. That's a powerful alignment tool. Luna: Before we wrap up, I want to mention something briefly. You know, we do this show every day, and it's entirely listener-supported. A handful of you chip in monthly through Buy Me a Coffee dot com slash fexingo. That's literally what keeps us ad-free and able to cover these niche topics that wouldn't get airtime anywhere else. Lucas: Yeah, it's true. We don't run ads, we don't have sponsors. It's just a small group of listeners who believe in independent business journalism. If these conversations are useful for what you're building or running, that's the only reason we can keep doing them. Luna: So thanks to those who already support us. And if you're thinking about it, that's Buy Me a Coffee dot com slash fexingo. No pressure, just a fact. Lucas: Alright, back to rolling dividends. One thing I want to highlight is a structural variant that's emerged in the past year: the 'dividend clawback.' Some companies include a provision that if an employee leaves within two years of receiving a dividend, they have to repay it. That's a pretty strong golden handcuff. Luna: That sounds aggressive. Is that common? Lucas: Not yet. I've seen it in maybe three percent of the companies using rolling dividends. But it's controversial because it can be seen as punitive. Most companies prefer a simple vesting cliff: if you stay for the quarter, you get the dividend. If you leave mid-quarter, you forfeit it. That's the more common approach. Luna: So the key takeaway for founders: if you're in a talent-intensive sector and you need to lock in key people for a multi-year development cycle, rolling dividends might be worth exploring. But you need to be very careful about the cash flow implications and the tax treatment. Lucas: And you need to have a good 409A process. The notional value needs to be defensible. If your dividend is based on an inflated valuation, you could be overpaying and creating a future liability. I'd recommend talking to a compensation consultant who's done this before. Luna: Well, we'll keep tracking this trend. It's one of those things that could become standard practice in a few years, or it could fade if the public markets recover and equity feels valuable again. But for now, it's a creative solution to a real problem. Lucas: Absolutely. And that's the theme of this whole summer: startups are getting creative with compensation because the traditional tools aren't working as well in this market. Rolling SAFEs, rolling dividends, rolling funds — it's all part of a broader adaptation. Luna: Thanks for listening. We'll be back tomorrow with another angle.