Sharing equity with employees? Not so fast.

Sharing equity with employees?  Not so fast.

It’s an accepted norm in technology and many other businesses that some form of equity sharing is useful, and often essential to the recruitment and retention of talent. Many smaller companies embark on it in good faith only, it seems, to find it becoming a severe management headache.

Looking to share some experiences at a recent meeting of our IT Leaders’ Forum, we asked a group of CEOs, business founders and a private equity investor their views on sharing equity in their businesses. The initial reaction – “don’t do it” and “I wish I hadn’t” – were spoken mostly in jest. But the scars were also visible – “a good idea in principle, a nightmare in practice”. They had clear views on how they’d do it differently in future.

Don’t do it.  I wish I hadn’t.  Just don’t!

If you are considering sharing equity, then you might find their “top ten” tips useful:

  1. Don’t agree to anything on day one. It’s easy to get trigger-happy with a new business partner or member of the team. Avoid the temptation.
  2. Get a conditional shareholder agreement in place. Without this you’ll be in difficulty later on. Think of it as pre-nuptial agreement.
  3. Align expectations. You might think you’re being generous, but fairness is “in the eye of the beholder”.
  4. Make options conditional. If employees leave the company before the exit, they relinquish their options.
  5. Significant others only. A long tail of small shareholders serves no purpose. You’re better off without them.
  6. Reward the value-creators. Obvious, but overlooked. Again, don’t get trigger-happy.
  7. Use it to incentivise. Equity is precious. Using it as an incentive serves to grow the equity value rather than dilute it.
  8. Work in real value. Avoid percentages. Instead, translate equity into monetary value at the proposed point of sale. “When we realise x you will get y”.
  9. Have a realistic exit plan. People need to believe in the liquidity of the scheme for it to be a real incentive.
  10. Update regularly. Keeping participants informed brings the scheme to life, and helps them focus on the end goal.

All of the participants in our group agreed on one thing – thinking it through and getting it right at the outset saves an awful lot of pain later on.

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