As you envision the growth of your company, do you think stock and option programs can be powerful tools to drive the desired progress? If so, what goals do you hope to achieve by introducing such incentives for your team? Most startups and scaleups today introduce some form of share or option program for employees. However, there are a number of considerations to take into account when assessing the best scheme for your company.
In this article, we will look at the 7 essential elements you need to create a robust, viable and appropriate share or option program for your company.
You'll gain insights and tools to help you make informed choices, with the aim of realizing your vision for your company's future. Stock and option programs can indeed act as a catalyst for engagement and loyalty, but landing on an optimal structure requires thoughtful consideration.
Here are seven key points to consider.
Before taking the plunge into share or option programs, you need to have a clear understanding of what you want to achieve: is the goal to attract top talent, increase employee motivation, retain key employees, save costs, or a combination? The balance between these goals and the impact they have on existing shareholders and other stakeholders is crucial.
A share program must work in harmony with your current business plan, ownership structure, articles of association, shareholder agreement and any existing incentive agreements. Consider the existing scope for action: Has the board or general meeting already approved a share compensation program to be put in place? Are there expectations or promises made that need to be fulfilled or taken into account? What motivates the various employees? Are there many or just a few? If there are few employees who will be participating in your share or option program, it is all the more important to clarify expectations so that you can meet their expectations or what motivates them.
Another important factor in the choice of structure is the valuation and risk profile of the company. This can have a significant impact on the barrier for employees to participate in different structures, both in terms of cost and risk. But this can have a major impact on the tax consequences for both the company and the employee.
There are several share programs to choose from, and each has its own characteristics. You need to consider what best suits your company's stage, needs and goals. Should you have restricted shares, a combination of shares and options, do you qualify for options for Startups or perhaps you should consider the Kruse Smith model?
If you opt for options, there are several conditions you need to consider:
- Exercise price
- Start date and expiration date
- Earning program (time, milestones)
- Should there be accelerated vesting
- What happens if someone quits?
You have some freedom of action here, but if you want to qualify for options for Startups (which are tax-favorable for the company and employees), there are several criteria that must be met. It is crucial to do thorough work in this process.
It's about finding the right balance between practical feasibility, risk, and cost and tax optimization for both the company and the employees. Different structures have different tax consequences for the company and employees.
Once you've decided which program is appropriate, you'll need to develop a plan for who should be included, how much they should receive and other future considerations such as new hires or capital raising. It's also important to establish clear guidelines on what happens to shares or options if an employee leaves the company. You should ensure that you don't end up in a situation where you have many passive owners, while at the same time balancing this with what are fair terms for the beneficiaries. Here you need to carefully consider and weigh up the pros and cons.
Equity programs can be complex, and it's crucial that recipients understand what they're getting, including potential costs, risks and upside. Most people struggle to understand this. What you don't understand doesn't have a good motivational effect either.
You can address this by making the information accessible and understandable, not only at the time of the contract, but also as the company evolves. You can use a digital portal that displays this information and that your employees can follow "live". They get a good overview of the development of what they own, see the effect of the accrual plan in practice, and important dates they need to relate to. This makes it understandable and employees can see that their work helps to create value, which in turn can contribute to increased motivation.
Share and option programs require careful administration and compliance with reporting requirements. You need to report at different times for the different structures, and with different data. As a business leader, it's your responsibility to ensure this, and help is often sought from an accountant. You need to maintain an ongoing dialog with them and make sure they have the right data available, including documentation, amounts, dates and any other conditions. With a dedicated portal, all the necessary data can be easily accessible (and correct) for both you and your accountant. The accountant can then also retrieve this themselves, without having to involve you to start searching for this information from various folders in your alternative personal archive.
In today's digital era, it's important to use technology to simplify the administration of share and option programs. A platform like Unlisted's portal can initially help you issue options directly from the portal without the need for legal assistance, with templates designed according to best practices that ensure a good structure. Then it's easy to keep track of and manage ownership structures in an efficient and transparent way that makes administration less time-consuming and much easier. A dedicated employee portal ensures that you get the most out of the motivational effect of these incentive schemes.
Setting up a share or option program is not just something you should look at as a financial decision, but rather a strategic tool that can have a significant impact on your company's future.
By carefully considering these elements, you can ensure that your program is not only fair and thoughtful, but also optimized to support your company's growth and vision.
If you would like further clarification and advice on share and option programs, Unlisted's advisors can assist you in the process.
