Last updated: 19 April 2024
You're eager to implement an employee share scheme, and that's fantastic news! But are your employees on board with the idea?
It's essential that your team is equally as enthusiastic and well-informed. Getting their buy-in and engagement is key to unlocking the Ownership Effect.
And with that, your team will have questions, and rightly so. Questions you want to (and ought to) be prepared to answer.
So let’s make sure that you’re well-equipped to explain the significance of your company share scheme and rally your team behind what is genuinely an exciting opportunity.
One of the first questions an employee is likely to ask is, "What's in it for me?" In other words, why should they care about the company's share scheme?
Well, here's the thing - these shares and options have the potential to translate into a life-changing sum of money. The more effort and dedication your team puts into making the company a success, the greater the potential reward.
Imagine owning a piece of the company's success story. As the company grows, so does the value of those shares. The company’s success could transform your team’s financial future. And that’s an exciting prospect!
How many shares they get is up to you. And you can work that out here.
A common misconception is that founders need to give away a huge slice of the pie in order to set up a share scheme, but that’s not the case.
Typically, companies have a total share scheme pool of 5-20%. And within that, specific amounts are earmarked for certain roles, early joiners and future hires.
“Who you reward with significant equity depends on when they joined, and how your company functions, or may function in the future.”
- Co-founder and CEO, Ifty Nasir.
Whatever amount you determine as reasonable and fair - respective to their contribution and when they joined - communicate that clearly. And for trust and transparency’s sake, they ought to understand the logic behind it too.
How you value employees' shares is one thing. How you communicate that value is another...
Let's start with the valuation as that impacts their potential financial gains. Here's an example using Enterprise Management Incentives:
If you give your team access to their own shareholder dashboard, they can see their shares and the company's latest valuation. This empowers them with knowledge about the current and potential future value of their shares. Seeing all of this in real-time will really hit home.
In terms of how you or senior leaders personally communicate value - transparency is key.
Here's an example of how Uri Levine, the co-founder and former chairman of Waze, might break it down for employees:
They can stick or twist. In other words, once they have access to their shares, they can keep them or sell them. I’ll use the EMI example again to explain.
EMI options vest over time, which basically means that they’re not available immediately. Instead, employees earn them as the years go by. Once their EMI options have fully vested, they can buy them. We call this exercising, which turns those options into shares.
At which point they can:
The choice depends on factors like share class, associated rights, buyback provisions, and contractual clauses.
It's crucial that your team fully understands the choices they have, and potential outcomes, to make informed decisions about their equity rewards.
How you design your scheme impacts when, how and under what conditions your team can benefit from their equity rewards. For instance:
With exit-based schemes, your team will benefit when the company is following an exit event e.g. the company is sold or goes public (IPO).
E.g. 25% of the employee's total allocated shares will vest after two years of service, followed by another 25% the year after and so on. A time-based vesting schedule is one way of improving retention.
You can set both time-related and performance-based conditions. Only once those conditions are met can the employee unlock their shares.
If an employee leaves, you can decide whether they keep or lose any vested shares. We say let them keep that which has vested unless they’re a “bad leaver”. Clarity is paramount here. Ensure that your team fully understands how and when they can realise their equity rewards.
No catch, but they need to know the facts. They should understand the intricacies of the chosen scheme.
Going back to our EMI example - the scheme offers superb tax benefits but only if both the employer and employee follow HMRC’s rules.
For instance, EMI options have a 10-year exercise window. After that, they lose their tax benefits.
Also, any time or performance-related conditions that impact the vesting of their shares or options must be specific, tangible, measurable and agreed to by them.
Answer your team's share scheme questions openly. It helps everyone get on the same page and excited about the journey.
That’s why we created customisable resources for our customers to educate their employees about the benefits of their share scheme. And continue to engage them.
Skin-in-the-game can be life-changing, and as soon as they understand that, they’ll be more invested in the company's success.
If you have any questions about share schemes including how to maximise engagement, speak to the UK's share scheme specialists. Book a free consultation for a time that suits you.