Simple and Effective Share Schemes for Private Companies

What makes a business successful? A great product or service, a business owner with passion and energy, but perhaps most importantly of all – a highly focused and motivated management team to drive it forward.

As a business owner growing your company you may not be in a position to offer employees the same financial rewards available at more established companies. However, employee share schemes and share incentives are a key tool that you can use in recruiting, retaining and motivating key employees.

Research by the ESOP Centre (The Employee Share Ownership Centre), a not for profit research and membership organisation, has shown that companies with high levels of employee ownership consistently outperform those with no or lower levels of employee ownership.

This may be because employees who are co-owners act like owners, which is good for the business. It is suggested that those most effective at team building will be those instinctively inclined to share, to reward loyalty and hard work. It may be, therefore, that wider share ownership is indicative of the style and culture of the company founders. An Employee Share Scheme conceived simply as a means to celebrate collegiality is no bad thing, however for a share scheme to be truly effective, it must go further. The owner must take the time and trouble to think through his exit plans and how these dovetail with the incentive scheme and the rewards to be offered.

What will work for you? The following questions may help you come to a conclusion.

1)      Are you ready to share ownership?

 Co-ownership brings additional responsibility. Can you achieve your objectives with a cash bonus scheme without the complication of equity incentives?

 2)      What scheme is right for you?

 Essentially, there are three choices:

(a)   outright share ownership from day one;

(b)   an option to acquire shares over a set period or at a future date; or

(c)    an exit conditioned option to be exercised if and when the company is sold.

 3)      Which of the alternatives is best?

 For start up and early stage companies, option a) is likely to be the best. For more mature companies seeking to lock in key employees ahead of an exit, option c) may be more appropriate.

 4)      How to fix the level of employee share incentives?

 In a start-up, equity will be divided according to the cash contributions or salary sacrifices made by the key participants.

 For a company expecting to exit within 5-10 years, a good approach would be to project an achievable exit value and use this to calculate a percentage that will motivate employees.

 5)      Are there any tricks to help make the share incentive more attractive?

 One technique is to re-organise the share capital by issuing bonus shares making a higher number of shares available. This will have the effect of making your incentives appear more generous, even if each share is worth correspondingly less.

 6)      What are the risk areas for the business owner?

 The scheme must not frustrate your ability to sell the company at the price and timing of your choosing. This is easily achieved by including a “Drag Along” option in the company’s Articles of Association.

 If there are two or more founders, it is possible for employee shareholders to end up with a “swing vote” enabling them to assist in removing a founder Director. If this is a concern, then employee shares can be made non-voting.

 7)      What factors should be considered in valuing shares?

 Share valuations can vary wildly depending on the valuer and the purpose of the valuation. Minority interests will frequently be valued at a substantial discount to a controlling interest. A well advised company can often achieve the valuation that it believes is important to its business objectives.

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The successful design of a share scheme involves a complex interplay of commercial, tax, valuation and legal issues.

[calltoaction]If you would like further information on Employee Share Schemes, please do not hesitate to contact an Everyman Advisory on 01386 240145 or email james.hunt@everymanadvisory.co.uk[/calltoaction]