I was speaking to a SaaS business owner recently who was putting an EMI share scheme in place for her team. Sharing ownership was critical to her. There are the obvious business benefits that come from aligning interests with a real sense of ownership (employee owned business outperform their peers).
Check out our Complete Guide To Setting Up A Company Share Scheme to learn more about how share schemes work.
But for this business owner it was about a core value her and her business partner shared:
“Humans should get to share in the success of what they create together.”
She wanted to create terms for her share scheme that aligned with her beliefs. This isn’t the first conversation of this type I’ve had and this time I wanted to capture and share it in case it was helpful for other business owners grappling with similar decisions. There were four key areas where the professional advice she was getting didn’t align with her values.
Don’t include ‘Good leaver’ provisions
Set exercise constraints to be on ‘exit only’
Restrict voting rights
Delay vesting as late as possible
It’s hard to argue with advice from professionals, and you shouldn’t do it lightly, no one wants to screw up their business. Share schemes are something most people investigate once or twice in a lifetime so best to heed the advice of those that do this day in day out.
But, what if what’s been done before isn’t right for you and your business? What if the whole reason your business exists and is successful is because you did something that hasn’t been done before? What if breaking convention, spearheading change and encouraging new ways of doing things is in your DNA? What if you hear advice and your intuition, that feeling deep down in your gut, tells you that it isn’t right? Usually, on issues as complex as shares and equity, your brain will quickly kick in and your rational mind will advise you to listen to the professional. How could you possibly know better than them?
But then you read another book, blog or listen to a podcast and hear more examples of business owners and businesses you admire who have done things differently. And, in fact, that’s the kernel behind their success. They are breaking new ground with every decision they make. Challenging old thinking. Balancing out the power between owner and creator. Being brave enough to follow their intuition and create a world they feel is fairer and more aligned with the change they want to see in the world. Critically, they seem to have managed to have done that and not killed their business in the process.
How can you have confidence that your decisions will do the same? I certainly wouldn’t advocate not seeking professional advice in matters as important as your shares and equity. Below is simply an alternative perspective for each of these points, direct from a business owner’s mouth. It’s worth saying, that in almost all cases we find, the professional giving advice is honestly trying to act in the business owners best interest. The challenge is we all have different motivators and what they believe to be yours may not be the case.
1. Don’t include ‘Good leaver’ provisions
If a team member had to leave (say for personal reasons, to care for someone), she wanted that person to know they’d still benefit from the creative input and hard work they provided to get the business to that point.
The professional advising her response was “why would you want to do that?”. Their world view was that you want to end up having shares exercised in the least amount of situations. Meaning the business owners and investors end up with a greater proportion of the equity (and a higher return in the event of a sale).
That will understandably be the right decision to make for a lot of business owners. Its important to also note that this term requires discretion each time someone leaves. The decision could be argued against by the employee if they felt they’d been unfairly labelled as a ‘bad leaver’.
However, this business owner didn’t feel it was fair or conveyed the sense of a shared journey she wanted the team to be on together. Of course, if someone left within the first few months they obviously haven’t demonstrated their commitment and shouldn’t receive ownership. If however, they’d been there two years and life circumstances suddenly changed, she wanted the team to know their efforts and the progress they’d helped the business achieve over those two years wouldn’t be forgotten. To the contrary, she wanted them to know they’d get the shares they had earnt up until that point and support from the business to make the transition to what they had to do next as painlessly as possible.
There is a clear business benefit to this approach too. When the team see the owner caring about the fairness of their situation this much, it builds trust in a way that would be hard to otherwise foster.
2. Set exercise constraints to be on exit only
She loved the team and the business and right now wasn’t convinced they wanted to ramp up to an exit. When exercise constraints are limited to exit only, the recipient will never actually be a shareholder, and so won’t ever get dividends.
They wanted a scheme that was fair even if the business decided not to exit. Exercise constraints have the potential to misalign interests as employees get stuck unless the business gets sold. If the businesses owners aren’t intending to sell this can create friction. A lot can happen in 5–10 years and they wanted to ensure the deal was fair whatever they decided to do.
We’ve talked to a number of businesses recently who are actively changing their exercise constraints to be more balanced so they encourage the sort of behaviour and attitudes the business will thrive on. If employees only get value if their shares are sold, their focus is on selling and leaving. Mixpanel have recently written about their changes.
3. Restrict voting rights
Ownership vs control is a debate that often comes up for business owners. There is no right answer here but it’s important to understand both side of the conversation. Giving a sense of ownership without control can still be hugely powerful if the business’s exit plans are clear and attractive. If however the team are driven by different interests, sharing control can provide a real sense of agency and purpose towards the initiative. A sense of shaping the future they are part of.
This business owner strongly believed that feeling that your voice counts and will be heard on par with other investors and shareholders, would incite the sort of remarkable behaviour the business needs.
4. Delay vesting as late as possible
What happens in silicon valley is quite different to the UK. Its a different market with different constraints. But there are some ideas that form there which UK business owners wish to emulate. However, when they ask a professional about employing these the advice is generally “oh, its different in the US”. A key one of these ideas is vesting periods.
Typically, in the US, after a 1 year cliff, shares will often vest with employees on a quarterly or monthly basis. There can be restrictions on leaving but generally you get the shares for the time you’ve put in. If you need to leave, that’s fine, but you wont get any more shares in the business.
In the UK, the general situation is quite different. Shares often vest after 3-5 years and if you leave within that time horizon you get nothing.
The rationale is that the businesses gets complete lock in for as long as possible as the incentive is all back loaded. In reality what happens is the equity seems so far off and ethereal that it often doesn’t create the desired effect. Everything we know about human psychology tells us that we will actually get more commitment from lots of little, regular rewards rather than one giant one far into the future.
So why do professionals in the UK still advise this? Well, it seems some still hold a more traditional view on what motivates people. Whereas there is a counter-intuitive view that what seems best for the business might not actually be — especially if it is not best for the recipient.
Sharing equity early and often is something you may get advised against. However, it is often the thing that keeps ownership front of mind, tangible and more likely to achieve the benefits of sharing success you intended to create when you set out to put a share scheme in place.
So what does this all mean?
The truth is that people think differently and a lawyer, accountant and tech entrepreneur may all have different world views.
There is nothing better or worse with any particular view. And in fact it’s wise to seek out the opposite to how you think to give you greater context and perspective when making important decisions. The world is a better place for having a diversity of thinking and people. Just make sure you are clear on the type of business you want to create. And that you and the people who have influence over how you create your business share similar values.
Questions about share schemes? Start with our Complete Guide To Setting Up A Company Share Schemes