3 Reasons Why Startups Should Set Up A Share Scheme Early
You might think that share schemes are something only set up by established businesses with a large number of employees. The truth, however, is that share schemes are a great thing to have in place early, no matter what stage your business is at.
1. The shared ownership effect
When you’re building a new business, your team’s commitment is a factor you shouldn’t underestimate or undervalue. Depending on their role, and the type of person they are, each team member might have different motivations for taking on the job in the first place. Which dictates their commitment to the job.Perhaps they like the challenge of their task, perhaps they’re commercially motivated, or perhaps they just believe in what the business is doing and want to see it succeed. This might not sound like a problem, but what happens when the task becomes less of a challenge or any financial return seems a long way off? The most motivated team member is going to be that last one - the one that believes in the business. So wouldn’t it be best for you and your startup if everyone’s interests could be aligned?Aligning interestsShared ownership is one way to achieve that. When someone owns a piece of the business, no matter how small, their whole relationship with that business changes. It’s not just a day job any longer, they have a vested interest, and so does the rest of the team. It puts everyone on an even footing because you’re all going to share the fruits of success, but also the associated risks.“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, where risk and reward are closer aligned and where profits are distributed more fairly.” Norman Lamb, Minister for Employment RelationsHow to do itThere are various schemes you can set up for your team in order to issue them shares in the business.Even if your team is a mix of employees, part-time staff and advisors, there are options. You can set up an EMI (Enterprise management incentive) which is the most tax efficient for employees, and use either unapproved options or growth shares for your other team members so they get the benefits too.
2. Create a sense of purpose
“Happiness can increase productivity by 12%.”This statement came from research conducted by the University of Warwick. It presents a good argument for doing what you can to ensure your team is happy. There are many techniques and strategies you can implement to keep your team happy (our friends at The Happiness Index are experts in it).Shared ownership is one way of engaging teams that’s being adopted more and more. I discussed the ownership effect above, but now really want to look at how it creates a sense of purpose. Just because you have a vested interest in the success of the business you work for doesn’t necessarily mean you’re going to love doing it more. But what shared ownership also gives you is a knowledge that what you’re doing is making a difference. By all working together with aligned interests you and your team share the same goal. It’s not a waste of time, your individual contribution makes a big difference and you’re a key part of your team. Those are some pretty powerful emotions being produced! And they all lead to happier and stronger teams which will help your business get through the tough times.“Empowered employees are the holy grail for any business leader. They are devoted advocates of the business, who will always go above and beyond for you. This will have a knock-on effect, which can create a culture of hard work, accountability and loyalty.” Joe Wedgwood, The Happiness Index
3. The earlier you participate the more benefit for your team
If you are setting up an EMI scheme for employees, it’s best to do this while your company is of fairly low value as this means the amount of income tax your employees have to pay when exercising their shares is also lower.For your other team members, you’ve got a couple of choices. If you choose to issue unapproved options then it doesn’t make much difference when you issue them. If, however, you decide to go with growth shares, the sooner you issue them the better as the hurdle is lower. That means your team will get to share in more of the upside.