As the UK continues to strengthen its place on the global tech map, we see more founders looking to compete worldwide to secure great talent and equity could be a real differentiator in helping our homegrown startups succeed.
Offering your team a slice of your company’s potential in the form of share options has become the benefit-of-choice in early stage startups. It enables new businesses protective with cash and unable to pay market rate salaries to attract the world-class talent they need by offering an alternative form of compensation. Before co-founding equiCraft this year, I spent the last six years heading up the legal team at Peak AI, one of Manchester’s fastest-growing scaleups and a key focus was managing the employee share option schemes through a period of rapid growth. That experience taught me that if designed, implemented and managed well, equity schemes can be the company’s secret weapon to retain and incentivise the best talent as the company scales, with additional option awards being an efficient way to reward employees at key milestones in place of bonuses.
Not only do bonuses put pressure on the company’s cash-flow, share options can often be more attractive than bonuses to employees. Firstly, because the options can grow in value over time but moreover they are much more tax efficient when granted under an HMRC approved EMI scheme.
Generally, share options are awarded according to a vesting schedule with employees being entitled to a part of their grant each year over a number of years. A typical schedule spreads over four years with the employee receiving a quarter of their grant each year for four years. This gives your team a great incentive to stay with you on the growth journey for longer – if they leave early, then they won’t receive the full value of their award. In a successful startup, that could be the difference between thousands and tens of thousands of pounds to the employee.
But share options aren’t just about hiring and retaining talent. We all want a satisfied, motivated and productive team and equity can play a significant part in garnering that commitment. While some shareholders may be wary about their stakes being diluted by employee shareholders, this is usually outweighed by the long-term benefits of having an engaged team who adopt an ownership mindset. With everyone aligned towards the same goal of success, ultimately all shareholders benefit as the value of everyone’s equity grows. Nurturing that team unity feels more important than ever right now as workforces become increasingly distributed geographically due to remote working.