It’s that time of the year again, summer’s fading fast and business owners are heads down trying to make the rest of this year count. The way you finish the year will mean everything to your employees, as that’s how their Christmas bonus is usually calculated.
However, you’ve likely been grappling with how you can break out of this short term thinking about the business and create a smarter incentive for everyone. Do any of these resonate?
How do I give the team something longterm, that last beyond the festive haze? A gift that will keep giving as the business grows.
How do I reward the team for all their efforts when we don’t have profits to share? How do I let them know how much I value their contribution?
How do I reward the team when we do have profits but the best thing for the business and the team, longer term, is to invest those profits into future growth?
How do I reward the team in a way that aligns their interests with those of the business, shareholders and gets us all on the same page?
How can I give them a greater sense of ownership and reward for the critical contribution they’ve made? Cash bonuses and profit shares feel so transactional.
Giving shares to your employees can be an incredibly powerful motivator and something that can have a much greater impact on their life, longer term, than a cash bonus today that will be forgotten in the aftermath of New Years eve.
Like most business owners considering giving equity, you’ve likely been grappling with questions and concerns like these:
What’s the real value to the business?
I’m worried I’ll give shares and the team wont value it.
I’ve heard it will costs more than the bonuses I intend to pay just to set up the scheme.
It’s going to take a lot of time, admin and paperwork to get set up.
There is certainly some truth to these concerns, however, there are also a lot of misconceptions. Let me try to clear a few things up so you can decide what will be more powerful for your business in the long run…
What’s the real value to the business?
Well, the data is pretty conclusive here. It’s known as the “Ownership Effect”. Supported by a host of research, it shows that when someone owns even a small piece of equity (shares) in a business, their relationship with that business changes: they bring more to the table, emotionally, psychologically and demonstrate enhanced commitment. It simply makes commercial sense for even the most hardnose of business owners and competitive of industries.
Over and over again, we see those that share, outperform their peers and win. Its why most silicon valley VCs advise founders put in an option scheme when they invest (if they’ve not got one in place already). They’ve seen the impact it has on creating successful businesses, time after time.
“We adapt and apply best practices from Silicon Valley to our startups in Europe, to prime them for success. One of the key ingredients is employee ownership.” Index Ventures
Here are three key business benefits:
Engaged team through aligned interest — happier workforce and a happier place for you to turn up to each day. By allowing your employees to share in the success of what you create together you all get on the same page and focused on the same goal.
A more productive business that outperforms its peers — The UK employee ownership index (an index of companies which have 3% or more of their issued share capital held by or for the benefit of employees other than main board directors) has outperformed companies that don’t share ownership consistently since 2003.
Attract and retain the best people — The labour market is fiercely competitive. Major corporates, internet companies and consultancies are all vying for the top candidates, particularly for technical roles. Smart people want to feel a sense of purpose about the work they do. No greater creator of agency than a real sense of ownership in what they are helping to create.
I’m worried I’ll give shares and the team won’t value it?
This is certainly a valid concern. Too many businesses go down this route and get only a fraction of the value because it’s communicated poorly. Critical to the success of any scheme is the communication that goes with it. Why you are doing it, and what it means for them and the business. Posting them a share agreement document to sign and return and then never mentioning it again does not promote this. Not thinking about cliffs and vesting schedules also doesn’t help. Three things to think about so you and the team get the most out of sharing ownership and keep engagement high:
Structuring them appropriately — when will their shares start to vest (the cliff), over what period (typically 3–5 years) and frequency (monthly, quarterly or yearly).
Communicate them powerfully — ensure you communicate the process, what it means and why it’s valuable, to the team. Create an event day to launch the scheme and paint a picture of where you are trying to get to. Make it clear they are shareholders now, not simply employees. Now they’ll share in all the success they help create.
Regularly re-engage them like shareholders — sharing ownership is about employee engagement so ensure you do this regularly so as their shares vest they have a sense of their slice of the pie growing (tools like Vestd can help here).
I’ve heard it will cost more than the bonuses I intend to pay just to set up the scheme?
That used to be true. Traditionally, you’d fork out anything up to £10k just to get a scheme set up and in place. However, that’s no longer the case. Technology now does a lot of the hard work, reducing the extortionate fees that used to be paid. Tools like Vestd completely remove the heavy upfront fees and allow business owners to pay monthly like all the other services they use. With scheme plans starting at just £150/m with no hidden extras or setup fees, cost is no longer a barrier.
It’s going to take a lot of time, admin and paperwork to get set up?
Yes and no. If you do things the traditional route then yes, you are setting yourself up for a huge amount of work to get the scheme in place and then manage it. However, that needn’t be your reality. Software can now do most of the heavy lifting and the process can be 100% paperfree making your admin virtually zero.
What if circumstances change in the future? I don’t want to be tied in if people leave.
This is understandably a concern for business owners. However, the reality is it’s due to a misunderstanding of how a share scheme would work.
Shares given through share schemes are almost always given some degree of “conditionality”. That means, you can set criteria which must be met for the person to qualify for receiving the shares such as remaining an employee or a specific delivery. With Options, this is the ‘vesting period’ and with Growth Shares, you would have a ‘conditional period’, during which the shares can be cancelled.
The criteria would typically consist of:
Number of shares — how many will they get
Time horizon (or vesting/conditional period) — when will they get them
Performance conditions — what they must do before the shares are fully theirs. This might include things like staying with the business for a minimum period. Minimum deliverables you’d expect from the person in that role. Etc.
So, as a business owner you have good protection should an individual leave or not deliver. You’ll never end up giving employees shares (or rights to shares), if they have not fulfilled what was agreed upon.
If, like a lot of business owners, you’ve been thinking of setting up a share scheme, however, have been put off by the potential workload and costs, then I hope this article has helped clarified some of the main misconceptions. And I hope you’ll join the thousands of UK SME’s that have chosen a smarter way to incentivise their team.
What to do next? Get your copy of the only share scheme guide you’ll ever need it’s free, takes only 10 minutes to read and will help you understand how to put a share scheme in place at your business… before Christmas!
Vestd is the UK’s share scheme specialist. We are authorised and regulated by the FCA and every week, our experts, help more companies set up their EMI option schemes than anyone else.