Equity Share for employee - help
23 December 2005, 12:36 PM
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Equity Share for employee - help
Hi (sorry , .. work related).
I have run an IT company for 12 years (mainly as a one man band, with sub-contractors).
I took on an employee three years ago, and he is a top bloke (technical).
I want to cement his position/motivation by giving him :-
a) A bonus over and above his standard monthly take home, if we do well
b) An equity stake in the company (so if we sell it, he benefits ..).
I'm struggling a little bit , wondering what the numbers should be .
In particular, the equity stake thing .. I've spent many years building up client base, and over the last two years, hav invested (gulp) , over £100k of my own money (from re-mortgage), into the company , so we could develop a flagship product.
I don't think it's fair to just give him a huge share , as that wouldn't be fair on me, .. after all , I've borne the "risk".
However, I want to keep him motivated. (He is younger than me, an dis about to start a family, and has said that his main "focus" is upping his income now, whereas my focus is maximizing the companys value, so I can sell it , and reap the rewards of 12 years effort / risk).
I kind of think 20% is a nice figure ? Any thoughts ?
(Also .. what happens if we grow, and take on other staff , and decide that THEY need an equity share ).
Any help / advice would be really useful. Anyone been there , done it ?
Cheers - Mark
I have run an IT company for 12 years (mainly as a one man band, with sub-contractors).
I took on an employee three years ago, and he is a top bloke (technical).
I want to cement his position/motivation by giving him :-
a) A bonus over and above his standard monthly take home, if we do well
b) An equity stake in the company (so if we sell it, he benefits ..).
I'm struggling a little bit , wondering what the numbers should be .
In particular, the equity stake thing .. I've spent many years building up client base, and over the last two years, hav invested (gulp) , over £100k of my own money (from re-mortgage), into the company , so we could develop a flagship product.
I don't think it's fair to just give him a huge share , as that wouldn't be fair on me, .. after all , I've borne the "risk".
However, I want to keep him motivated. (He is younger than me, an dis about to start a family, and has said that his main "focus" is upping his income now, whereas my focus is maximizing the companys value, so I can sell it , and reap the rewards of 12 years effort / risk).
I kind of think 20% is a nice figure ? Any thoughts ?
(Also .. what happens if we grow, and take on other staff , and decide that THEY need an equity share ).
Any help / advice would be really useful. Anyone been there , done it ?
Cheers - Mark
23 December 2005, 01:11 PM
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The usual way to do it would be to give stock OPTIONS, which vest over a period of time - say 3, 4 or 5 years.
You can therefore keep him motivated as he potentially 'owns' a stake in the company and he is incentivised to stay for a period of time, as a minimum, as he only gets the stake in the company in tranches over a number of years.
So - if, for example, you have 100 shares in the company as a whole - you give him an option to buy 20 (there's the 20%) at nominal value (tyoically £1 a share), though these vest over 4 years (and he can exercise the options once they've vested, so 25% of the 20 shares at the anniversary of each of the four years).
He'd therefore have: 5% at yr1, 10% at yr2, 15% at yr3 and 20% at yr4 and beyond....
The exact percentages and timescales that you use are exactly up to you.... 20% sounds good (generous I'd say!)
Good idea and should work well IMHO.
Also - you can give the bonus you want, as he'll have stock and therefore will have rights to a dividend (which I would assume you use to the full to pay yourself, as a director, anyway?)
Shades
You can therefore keep him motivated as he potentially 'owns' a stake in the company and he is incentivised to stay for a period of time, as a minimum, as he only gets the stake in the company in tranches over a number of years.
So - if, for example, you have 100 shares in the company as a whole - you give him an option to buy 20 (there's the 20%) at nominal value (tyoically £1 a share), though these vest over 4 years (and he can exercise the options once they've vested, so 25% of the 20 shares at the anniversary of each of the four years).
He'd therefore have: 5% at yr1, 10% at yr2, 15% at yr3 and 20% at yr4 and beyond....
The exact percentages and timescales that you use are exactly up to you.... 20% sounds good (generous I'd say!)
Good idea and should work well IMHO.
Also - you can give the bonus you want, as he'll have stock and therefore will have rights to a dividend (which I would assume you use to the full to pay yourself, as a director, anyway?)
Shades
23 December 2005, 02:24 PM
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agree- options are a sound way to go.
you can have an accelerator (sp) event such as when potentially the firm gets sold. this means he either vests (cashes in his options) or swaps them for shares in the new firm before the agreed vest date. Options do sit on your ballance sheet as a non cost so worth investigating with a commercial lawyer/finance bod as to any implications.
another way would be to make him a director (has implications to him liability wise) say with a 5% stake in the business. this way if you get bought he gets a % of the sale price or swaps for equity in new firm.
worry about it in 2006 and have a nice xmas.
you can have an accelerator (sp) event such as when potentially the firm gets sold. this means he either vests (cashes in his options) or swaps them for shares in the new firm before the agreed vest date. Options do sit on your ballance sheet as a non cost so worth investigating with a commercial lawyer/finance bod as to any implications.
another way would be to make him a director (has implications to him liability wise) say with a 5% stake in the business. this way if you get bought he gets a % of the sale price or swaps for equity in new firm.
worry about it in 2006 and have a nice xmas.
23 December 2005, 08:05 PM
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Great advice .. what if others come on board ?
Guys, .. thanks very much.
Obviosuly "options" is the way to go here.
Just wondering .. if we take on other staff over the next 3 to 4 years, and they are top notch, and I want to incentivise them in the same way (bonus/options), .. how should I plan for that ?
Lets say for example that that I want to treat the new sales lady in the same way as my technical guy (whilst acknowledging that he was in "earlier" thean her.
If I give her the 20% , does that come out of my share? .. or is there a way I can protect my share (lets assume I decide on 80%) , right up to the eventual sale.
Any ideas (again) , most gratefully received.
Obviosuly "options" is the way to go here.
Just wondering .. if we take on other staff over the next 3 to 4 years, and they are top notch, and I want to incentivise them in the same way (bonus/options), .. how should I plan for that ?
Lets say for example that that I want to treat the new sales lady in the same way as my technical guy (whilst acknowledging that he was in "earlier" thean her.
If I give her the 20% , does that come out of my share? .. or is there a way I can protect my share (lets assume I decide on 80%) , right up to the eventual sale.
Any ideas (again) , most gratefully received.
23 December 2005, 09:40 PM
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Seems pretty straightforward - and using options would be identical in method.
You decide how much you want to keep, period - 80% you say. Therefore you can only give options on 20% total.... period.
You therefore have, for example, 1000 shares in your company - and give the technical guy options on, say, 100 - giving him 10%. Over 4 years, at 25% of the 100 per year. Therefore if he's still with you in 4 years he's got the 10%.
You'll still have 10% spare (your banked 80 plus the techies 10 = 90%) to give to others, in the form of options, as and when.
You may decide that the sales person deserves something - so 5% over 5 years, or the whole 10% over 4 years - or whatever.
What you can't do is magically find more shares without affecting your 80%.... So if you give the techie guy 20% it leaves you with 80% - to give any more to anybody will eat into your 80% (unless you agree with the other shareholders and issue more shares in the business and dilute what you and the techie have).
Just my thoughts again - might be right, might be wrong....!!
Shades
You decide how much you want to keep, period - 80% you say. Therefore you can only give options on 20% total.... period.
You therefore have, for example, 1000 shares in your company - and give the technical guy options on, say, 100 - giving him 10%. Over 4 years, at 25% of the 100 per year. Therefore if he's still with you in 4 years he's got the 10%.
You'll still have 10% spare (your banked 80 plus the techies 10 = 90%) to give to others, in the form of options, as and when.
You may decide that the sales person deserves something - so 5% over 5 years, or the whole 10% over 4 years - or whatever.
What you can't do is magically find more shares without affecting your 80%.... So if you give the techie guy 20% it leaves you with 80% - to give any more to anybody will eat into your 80% (unless you agree with the other shareholders and issue more shares in the business and dilute what you and the techie have).
Just my thoughts again - might be right, might be wrong....!!
Shades
24 December 2005, 04:24 PM
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You don't have to issue all the shares in your company, and it's probably best if you don't.
Say the company is split into 10,000 shares. You, as the owner, have 5,000 of them. The remaining 5,000 remain unissued.
You can allocate (say) 2,000 of the unissued shares towards employee incentives, i.e. options, but these only become issued shares when the options are realised, i.e. when the company is bought. You retain entire control of the company as you have 100% of the voting shares.
The advantage of this is that is you need/get external investment where only part of the company is sold rather than the whole thing, you sell a chunk of the unissued shares. This (obviously) dilutes everybody else's ownership, but the money from the share sale goes TO THE COMPANY and not to you, so in theory at the moment the sale occurs, the value of everybody's stake remains constant.
Of course, as I have absolutely no experience or qualifications in this area, I may be talking a load of rubbish.
Say the company is split into 10,000 shares. You, as the owner, have 5,000 of them. The remaining 5,000 remain unissued.
You can allocate (say) 2,000 of the unissued shares towards employee incentives, i.e. options, but these only become issued shares when the options are realised, i.e. when the company is bought. You retain entire control of the company as you have 100% of the voting shares.
The advantage of this is that is you need/get external investment where only part of the company is sold rather than the whole thing, you sell a chunk of the unissued shares. This (obviously) dilutes everybody else's ownership, but the money from the share sale goes TO THE COMPANY and not to you, so in theory at the moment the sale occurs, the value of everybody's stake remains constant.
Of course, as I have absolutely no experience or qualifications in this area, I may be talking a load of rubbish.
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25 December 2005, 08:12 AM
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20% is FAR to much 3-5% more realistic. If it was me it would be 1% at most and a decent bonus at christmas. Just becuase he does a good job does not entitle him to a share in the company. If he has done well give him some cash for christmas.
25 December 2005, 12:21 PM
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But then, you are the man who thought that it was appropriate to pay his employees in conterfeit notes that they had inadvertantly taken... That probably precludes you as a good source of advice doesnt it?
27 December 2005, 01:35 PM
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one final point - you can create shares of different classification/worth. I think 'D' shares are the most important with 'A'/'ordinary' being bottom. If you ever get taken over then these classifications become useful ie purchasing company will say, for the sake of this point, offer £2 per 'D' share and 30p per 'A'. All that comes from talks during take over but something again worth looking into.
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