Five founder concerns about employee share plans – and how to deal with them
Many private company business owners like the idea of incentivising employees via a share scheme. Advantages include attracting and keeping key talent in a competitive market. Using equity can also be an attractive alternative when cash is tight, and salary requirements are high.
Founders who’ve built a business from scratch will of course be protective about the value they’ve created, and will often have doubts about giving up part of their business. Fortunately, there is a wide range of employee share plans available which will allay founders’ key concerns.
Here are some suggestions for dealing with the questions we’re most commonly asked by founders thinking about employee share schemes.
I don’t want to lose control of my company
Consider using options that are exercisable only on an exit such as a sale. Share options don’t carry any rights to voting or dividends, and optionholders will exercise options and sell shares almost simultaneously at the time of a sale.
You could also create a different share class for employees. The shares might carry no voting rights; and could pay dividends at a different rate to founders, and at directors’ discretion.
I want to avoid dilution
Creating growth shares with a hurdle can protect existing shareholder value. Exit only options will ensure dilution only impacts at the point of sale. You could also attach performance targets to deliver specific levels of option exercise or share acquisition, which can help ensure dilution is balanced by value growth.
I need my plan to be tax efficient
There are a number of government recognised tax advantaged share plans that will suit most smaller independent companies – eg Enterprise Management Incentive, the Company Share Option Plan and the Share Incentive Plan. In comparison to cash or bonus payments, these schemes will typically result in charges to capital gains tax for employees rather than higher income tax and NICs charges. The company can often also benefit from NICs savings and corporation tax deductions.
If you can’t use a tax advantaged plan – for example, because you want to reward employees in a subsidiary company – there are other share plan arrangements that can be structured to deliver tax efficiency, usually involving the direct acquisition of shares by employees.
I want my employees to have skin in the game
You can allow employees to acquire shares directly, and pay full market value to ensure full commitment. However, you may need to think about how much your employees can afford to pay, particularly if your company is mature and carries significant value.
You can balance affordability with financial commitment in a number of ways. This might include putting in place delayed payments for shares, or awarding growth shares that will only deliver a return to employees beyond a certain hurdle, requiring a lower financial investment at the outset.
I don’t want to give up any actual equity
If you’re still not certain that equity ownership is the right thing for you, you might think about using phantom shares or options, or Long Term Incentive Plans delivering a cash payment. Such plans aren’t tax efficient, but they can tie your employees’ rewards to increased share value without using up precious equity.
RM2 has been designing employee share plans in private companies for over a quarter of a century, and we have a real understanding about founder concerns like these. We’re confident that we can provide a plan that’s designed to fit you and your employees. If you’d like to discuss any aspects of employee share ownership, contact us on firstname.lastname@example.org to arrange a call with one of our experienced advisors.