When people think of shares, they usually think of Ordinary Shares, otherwise known as Common Shares. Ordinary Shares grant shareholders a stake in the company, voting rights and in some cases, dividends.
It’s pretty standard for business owners to distribute equity this way. A survey we conducted last year found that most firms opt for Ordinary Shares. The thing is, Ordinary Shares are just that - ordinary. And sometimes, problematic.
Ordinary Shares are issued without any strings attached, incur tax on award and recipients become shareholders immediately, which is risky. What if they don’t deliver? What if their vision for the future looks different to yours?
Don’t be ordinary, be different.
Not everyone knows this, but other types of shares offer greater control and flexibility, like Conditional Shares.
What’s the difference between Ordinary Shares and Conditional Shares?
Unlike Ordinary Shares, Conditional Shares are exactly that - conditional. Meaning that set criteria must be met before all or some of the equity is released. We’re talking about KPIs and other performance-based milestones or time-related conditions.
That way, everyone knows where they stand and what must be achieved in order to earn their slice of the action. And you can rest assured knowing that you’re not giving away precious equity for little return.
Conditional Shares are perfect for fast-growing, ever-evolving startups and scaleups in need of flexibility. And for building early, effective relationships with co-founders, pivotal hires, and aligning teams.
Examples of conditions
We tend to break conditions down into two categories: generic and performance-based.
Generic conditions are generally time-related. Setting out a vesting schedule is a prime example. Whereas, performance-wise, it could be the completion of a project, generating ‘X’ amount in sales or bringing in new business. You can stipulate numerous and a mix of generic and performance-based conditions.
The crucial thing to remember is whatever conditions are put in place must be clearly defined, measurable and tangible. Clarity is key.
For a comprehensive list of conditions to consider when designing your scheme, download our free 26 Conditional Equity Milestones guide. And don’t forget, we’re here to help. Book a free consultation with one of our equity specialists today.
So, to summarise, Conditional Shares help to eliminate risk by setting out clear milestones to meet before equity is unlocked.
Some conditional schemes offer huge tax advantages for both the employer and employee. For instance, employees granted options via an EMI scheme are eligible for Entrepreneurs’ Relief at the time of sale. And employers can offset the costs. What’s not to like? More on the joys of Enterprise Management Incentives here.
So before you issue Ordinary Shares (the ordinary way), consider sharing equity another way with Conditional Shares.