Equity for all? The risks and rewards

“Everyone who makes your business work deserves equity.”

When Simon Squibb, the founder of HelpBnk, shared his thoughts on employee equity, everybody on LinkedIn put their two cents in. (LinkedIn is the new Facebook, right?)

Simon’s insights have paved the way for an open conversation about sharing ownership. And within the discourse, there are some real dimes.

Are equity incentives all that? Is equity the best way to reward employees? If so, how do you make sure you get it right?

Ps. If you don’t know much about equity, what we’re talking about here is company ownership - shares and options!

Is sharing equity worthwhile?

Yes, it is! Just about every study (in fact, every study we’ve ever looked at) shows that companies that share enjoy stronger growth, enhanced team harmony, better (much better) attraction and retention rates.

And we’re not the only ones. Many believe that giving employees skin in the game is the key to business success.

Our customers certainly think so:

More than 9/10 customers their share scheme has helped their company grow and develop.

It all links back to the Ownership Effect. Founder and CEO, Eric Partaker, sums it up nicely:

Once you offer them a stake in your business, it increases the sense of ownership and your employees are driven more to give it their best. 

Research tells us that when employees own a piece of the pie, they’re more invested (literally) and hungry for success. Because if everybody’s hard work pays off, they could take home a life-changing chunk of cash. 

In Simon Squibb's view, in today's turbulent climate, it makes sense:

Those thousands of people laid off at Microsoft if they had been given equity not just salary would have at least something scalable to fall back on. Of course, like any investment, it can not work out but I would not be rich today if I did not have equity in businesses and just took my salary.

Equity could very well be the thing that helps your folk prepare for the future and build long-term wealth. Let's face it - how many people can comfortably rely on just their pension pot?

From the business’ bottom line to the team’s ambition and drive, there’s a strong case for sharing ownership in some way, shape or form.

A fleeting trend or a serious transformation?

Today’s entrepreneurs are challenging archaic ideas about how to run a business and how to lead a team. Instead of a top-down approach, why not cultivate a winning culture from the ground up? 

As founder and CEO Joel Felsenstein puts it:

Building a team is about more than just finding warm bodies to fill roles; it's about fostering a community of co-creators invested in the company's success. 

Who wouldn’t want to feel valued and part of something greater? Chairman and NED Kevin McDonnell says it changes the dynamic completely: 

Equity can be like fuel for employee motivation. When they feel like partners rather than just employees. 

The number of employee share schemes operating in the UK has gone up by 80% since 2010. Does that sound like a ‘fleeting trend’ to you?

In a world largely dominated by cash, businesses are moving to models more reflective of the contribution made through human endeavour, energy, and hard work - an ‘equity economy’.

Understanding employee motivations

But does this ideal align with employee motivations? Business Consultant Michael Veazey raises a great point:

I think that for the *majority* (so not all of course) of employees, cash is the primary financial reason they come to work.

For some people, all that matters is having cash in the bank. All they’re after is a job that pays the bills and keeps them afloat during the cost-of-living crisis.

But in a survey of 2,000 UK workers, we asked what would be the deciding factor if they had to choose between two other identical jobs - one in three said a share scheme.

This aligns with what our equity experts are increasingly hearing from potential customers during their initial consultations. People in their teams are asking, “Do you have a share scheme?”

On the flip side, not enough employees are asking (or even know how to) - a serious blocker that Simon has identified: 

Most people I meet who 'don't want equity' don't understand the upside and how money works.

Too few people truly understand the value (or potential value) of equity. Unless you own a business or attended business school, you’re not likely to know. If more people were aware of the financial upside, I bet they’d beat the drum a little louder!

Where it gets complicated

But even if the desire is there, is it a luxury?

To forgo salary in exchange for equity is a privilege. And not a choice everybody can afford to make. Those who fail to recognise that are out of touch, as Growth Manager Sabina Iman quite rightfully points out:

Equity is great, but sometimes startups use this not to pay employees and it’s not the best way to attract top talent... Not everyone is privileged not to need a salary when joining a company. 

You can see why in the cash-strapped startup world, they might offset market salary with equity. But this should never (ever) be at the expense of an employee’s financial wellbeing.

But if a business is in a position to offer a fair salary and equity rewards, then why not? So many UK startups and SMEs can take advantage of tax-friendly schemes like Enterprise Management Incentives (EMI).

With share options, when the time comes, if it doesn’t make sense financially, employees don’t have to buy the shares. The ball is in their court.

If the company is feeling generous, the cost of acquiring the shares could be deducted from the employee’s final equity reward so they don’t have to cough up the cash. There's a little more to it than of course, but it's possible.

Other risks

Co-founder and CEO Daniel Priestley’s cautionary tale is enough to put any founder off:

I once gave a friend 30% of my business to join and help me build it (on top of a salary). He did a terrible job, forced his wife into a senior role and she did a terrible job too. I had to remove them. They sued the business and were able to get a massive payout for their shares. Had I not “given equity” the whole situation would have been avoided. Him “feeling ownership” lead to him treating the company like an entitled brat who could make bad decisions with impunity, take extended holidays and perform badly without negative consequences. 

Others chimed in to say that they too were taken advantage of. Our own research uncovered similar horror stories. It’s unfortunate, and even more unfortunate when you realise that situations like these are totally avoidable.

With a bit of thought and the right tools, you can build conditional equity agreements with built-in protections. A framework that distributes equity rewards proportionate to people’s actual contributions. 

Simply put by CEO Martin Gallardo:

I believe equity should also be tied (vested) to time or deliverables. 

Instead of “giving equity away for free” (which makes absolutely no sense) you’re giving equity to those who truly earn it. And not just employees, but co-founders, directors, key people overseas and even agencies and contractors.

It's crucial in tech co-founder Max Folaron's mind:

The key is to have certain conditions to make sure people are really involved in your business.

Specific, tangible and measurable milestones are the way to go to; mitigating the risk to the business while still getting everybody behind the company’s mission.

Check out our Conditional Equity Milestones guide for inspiration.

Key takeaways

Ultimately, this is what it boils down to:

1. Equity can’t compensate for a poor company culture

There has to be an affinity between the employee’s values and the company’s from the get-go. As Communications Consultant Rose Lord puts it:

Integrity, commitment and alignment I think are essential ingredients for the equity model to work as intended. Without a shared vision and values it could create toxic productivity.

You have to have a good thing going. If the bones are good, an equity incentive could be a welcome addition. 

2. Equity isn’t a substitute for a liveable salary

This speaks for itself.

3. Employee motivations matter

What makes your team tick? What would incentivise them to stick around? Usually, this is a combination of decent benefits, a competitive salary and a share scheme of some sort.

4. Conditional equity is everything

Time-based vesting is your friend. Attaching performance-related goals may be worthwhile too but they have to be attainable. 

5. Education 

If an employee accepts equity as compensation, they must understand that there are no guarantees. Their shares may or may not pay dividends in the long run (pun intended). 

Not only that but they need to fully get to grips with the value of their shares now, what they might be worth later and any vesting or exercise conditions. Founder Carl P. hits the nail on the head here:

Are they all aware of tax implications by holding these shares? Are they all aware of the liquidation policies surrounding their shares? 

There shouldn’t be any surprises. Education is key. That’s why we provide our customers with templates to help them communicate effectively. 

How to share equity safely

There is one thing that people do seem to agree on - actually dishing out equity can be complicated, and expensive. CEO and founder Jonathan Lundy's pain is all too familiar: 

Is there a better way than paying a solicitor thousands £££ to structure shares and then hundreds to award them? Feel I am missing some website that does it all above board and for 1/10 of the price/arse ache... 

Yes, it’s called Vestd. Book a free consultation today to see how hassle-free equity management can be.