Making the best of an option pool
Here is an interesting challenge: how does a fast growing company set aside a 10% equity stake for employees – earmarked for individual employees in a tax-efficient way – when it’s not certain when the company will achieve an exit event or precisely what its growth trajectory will turn out like?
This was the challenge facing Firefly Learning, a London-based global “edtech” business that provides a platform for communications between schools, their teachers, parents and students. Firefly was founded by Joe Mathewson and Simon Hay when they were GCSE students. Frustrated with the clunky way in which information was exchanged at school, they developed the first version of Firefly to help their teachers and fellow students have access to school information online and out of the classroom.
In 2016, Firefly secured the largest Series A funding for an edtech company in the UK, at £4.5 million. Now backed by venture capital investors the UK Business Growth Fund and Beringea, the founders wanted to ensure that employees shared in the company’s growth beyond the point at which the investors had come on board.
To add to the challenge, the founders threw in some additional constraints:
RM2 likes a challenge, and we especially like to work with founders who have such a clear vision and belief in the power of employee share ownership.
The solution we came up with was a separate class of employee shares over which EMI options were granted annually to all employees on similar terms – in this case pro rata to salary earned in the previous 12 months. Of course, an EMI scheme is a discretionary scheme that is more commonly reserved for key employees but there is no reason why it can’t be used on an all employee-basis. The employee shares were defined in the Articles as only ever worth in aggregate 10% of the company’s total equity value above the investors’ entry value – however many options have been granted.
So the annual awards of EMI options will give employees growing numbers of units of entitlement over the 10% stake, and the units can only be cashed in when the company is sold. No shares in issue, no wastage of the 10% stake, and exploiting the full flexibility and tax-efficiency of the EMI scheme.