Setting up a share plan – 5 key questions
Employee share plans are a wonderful way to attract new hires, incentivise key directors and motivate your staff. There is plenty of choice as to what kind of scheme you can use, and it isn’t always obvious which is the best one to choose. Before you go ahead, we recommend asking a few key questions first.
1 Why do I want to set up a share plan?
Everyone wants to motivate and retain their employees, but how will your share plan actually deliver that? Will you be paying dividends? Are you planning a sale in which case will employees share in the proceeds, and when? Will your employees be able to vote their shares?
If you want your employees to feel like owners, then their shareholding should usually deliver something, and that something is usually financial. Realistically, if you aren’t thinking about an exit, and you don’t want to pay dividends, you are unlikely to get employees to put their hands in their pockets to buy shares. An option plan that pays out on a sale can work well, as it doesn’t require employees to pay anything until they can realise a benefit. On the other hand, getting employees to pay something for their shares can help, for example, if you want your directors to have some “skin in the game”.
2 Who should join in the share plan?
Do you want everyone to benefit under the scheme? If so, do you want them all to be treated pretty much the same, or do you need to differentiate between employees? Or is your plan just for a select few people?
Importantly, are all your proposed participants actually employees? There are different rules for non-employees, such as consultants. If you have an “employee share plan” in place, you will usually need to set up separate arrangements for consultants.
If you’ve got a clear idea about who will participate, it makes it easier to decide on the right scheme.
3 What shares should I use?
Private companies can easily create different types of shares for use in a share plan. For example, you can create shares that don’t have voting rights, or shares that will pay dividends at a different rate to the existing shareholders (or even not pay dividends at all).
If you and your co-founders have already created a lot of value in your company, you might want to protect that value. You can do this by creating a new class of shares, ensuring that your employees only get to share in future value growth in the company.
We can talk you through the different share classes you might use as part of the share plan design process.
4 How much should I give away?
A really good rule of thumb for this is 10% of your share capital for all of your share schemes, of which about half should be set aside for executive schemes. However, this is very much a starting point, and the decision will ultimately be driven by your commercial objectives. For example, if you are making a crucial hire at the highest level you may be comfortable giving them a significant percentage of the equity to seal the deal. On the other hand, especially if there are private equity investors involved, you’ll very likely be limited to the limits that the investors will accept.
We can help you with equity modelling to identify the best equity split for you and your employees.
5 What happens if people leave?
Your employee share plan should always cover what happens to shares or options when employees stop working in the company. This will often depend on the reason for their departure.
Traditionally, if an employee leaves because of redundancy, illness or other reasons beyond their control, they are known as “good leavers”. This means they can sometimes get to keep some or all of their shares or options. People who leave to get another job are more likely to lose their shares.
You will need to think about how you want to treat departing employees. However, bear in mind that some employee share plans have specific rules for leavers which you won’t be able to change.
It’s also worth remembering that it’s much easier to deal with an optionholder who leaves than with an employee shareholder. If an employee has shares, there needs to be a mechanism to get the shares back from them. This will need considering before you put your share plan in place.
RM2’s expert team is always happy to talk through these initial questions with you, to help identify the right share scheme for you and your company. To arrange a free, no obligation consultation, contact us on firstname.lastname@example.org.