Why it's better to set up a share scheme sooner rather than later

Last updated: 17 April 2024

Share schemes equip businesses with a means to incentivise employees beyond capital alone.

Giving team members a slice of the action in the form of equity boosts acquisition, retainment, engagement and productivity, which all mean one thing: business growth.

A common misconception is that share schemes are reserved for larger, more mature businesses. Dishing out equity to employees early in a business’s journey may seem risky.

Surely the business needs to establish itself before considering a share scheme? What about share dilution? We believe there are many benefits to setting up share schemes sooner rather than later and here’s why... 

What are share schemes and why do they matter?

There are a few types of share schemes, but the Enterprise Management Incentive (EMI) is the headline act with regards to value and tax efficiency.

With an EMI scheme, businesses grant employees the option to buy shares later on at a price which is fixed today. At the point the options are exercised, they become real shares.

Options can be exercised after specific milestones are met (a vesting schedule) or after an exit event like the company being sold.

Since share prices are pre-approved when the business is worth considerably less than what it might be in the future, employees benefit from any future uplift in share value.

In the case of EMI schemes, there are additional tax benefits, which further enhance potential gains.

Here are just a few benefits of share schemes...

Share schemes help attract talent

At the start, there are so many tasks to tick off, like producing a strong business plan, undertaking market research, establishing company values and picking the right individuals at the right times to maximise growth. 

The latter is all the more important for remote teams.

In the current economic climate, it’s nearly impossible for businesses to raise salaries in line with inflation, and the job market is exceptionally competitive.

In light of this, equity provides the opportunity to offer employees something beyond capital alone. 

This can prove crucial in ‘winning the talent war’ and securing the individuals required for growth. And there's evidence that supports this too. Our survey with YouGov found that:

One in three said a share scheme would tip the scales if they had to choose between two otherwise identical roles. 

Share schemes help retain talent

Acquiring talent is one thing, but glueing individuals together with purpose and direction is another. Many startups fail due to poor team selection and lack of cohesiveness. 

Equity can be the common thread that unites a successful team. Team members will relish the opportunity to own part of the business they’re dedicating themselves to. 

95% of our customers with an EMI scheme told us it had improved employee loyalty.

Conversely, losing key team members is costly and can severely impact business productivity in the early stages.

Plus, goals are flexible and can be tailored to business objectives. For example, employees can exercise options as specific milestones are met, either individually or as a company or upon an exit event. 

Intend to build a business to sell it after a few years? Well firstly, get an exit plan together. Then look into exit-based options. Don’t intend to sell? Incentivise continued engagement with longer-term vesting schedules. 

Share schemes promote sound business governance

Collective ownership is becoming a marker of excellent business governance. Offering ownership demonstrates an ethical commitment to employees that drive growth.

A willingness and desire to provide ownership enhances a business’s ESG credentials and can even help businesses gain accreditation for their business practices.

For example, B Corps are encouraged to demonstrate a commitment to shared ownership. As Norman Lamb, the Minister for Employment Relations, puts it:

Employee ownership has a part to play in building a stronger, more diverse and dynamic economy; an economy which makes better use of our human resources.

Is my business too young (or small) for a share scheme?

We get asked this all the time. As a founder, you might be invested in the idea of offering equity but unsure of the timing. Parting with equity early on in the business’s journey might seem like a risky proposition.

In short, the earlier you set up a share scheme, the greater the potential benefits for all involved. This is especially the case for EMI schemes and growth shares.

Here’s why:

• Early employees are instrumental to growth. Acquiring and rewarding the best candidates keeps them on-side during the critical early growth period. 
• Identifying potential future leaders and rewarding them could be a winning long-term strategy.
• Strong governance credentials and ethical business practices have become a marker of success. Shared ownership structures are a valuable component here. 
• When all parties are philosophically aligned, establishing a culture of shared ownership is often empowering for both shareholders, partners, founders and employees.
• Setting up share schemes when the business is young provides maximum future benefits and tax advantages. 

The last point is key.

When a business is young, it likely has a low value, which theoretically increases the gains option holders could make in the future.

Conversely, if the business is already valuable with limited scope for growth, then the potential future gains for option holders are not as great. 

It’s crucial to highlight that a low valuation for EMI options doesn’t imply a low value of shares at the next investment round, and while investment (when present) is useful for calculating an EMI valuation, it’s certainly not the only factor. 

It depends on the scheme

The question of timing depends on how you wish to reward employees. Overall, timing is more sensitive for EMI schemes and growth shares.

You can choose to reward employees with EMI options, growth shares, unapproved options, or a combination of them all using Vestd.

• If you’re considering an EMI scheme, setting it up when the business is of low value is unequivocally better than waiting. This increases the potential gains for participants. 
• For unapproved options, timing is less relevant. 
• With growth shares, the sooner the shares are issued, the better, as the hurdle is lower and recipients will experience a greater upside. 

There are some more specific considerations, too, like share dilution. Offering equity might ring alarm bells if the founder(s) are concerned about diluting shares for the sake of partners or shareholders.

The sooner the better?

So is it better to set up share schemes sooner rather than later? In most cases, yes.

For young businesses, the ceiling is higher than for already-developed businesses with greater valuations.

From the employee perspective, receiving shares in a young business with great potential is probably the combination they’re looking for - especially the savvy ones.

If you strongly believe in your business or are already seeing rapid progress, what’s the point in wasting time? Setting up a share scheme could fuel the growth required to jump the next hurdle.

After all, share schemes work - that's what all the evidence suggests - then it's worth hopping on the wagon as soon as possible. 

Book a free consultation today to get started