Employee Share Ownership in Start Ups
Start Ups (also known as Development Companies) often find themselves needing to be able to offer employee share schemes to retract and retain the talent they need to grow and establish themselves as a successful business. In some Start Up sectors, it has become expected that equity participation will feature in an employee’s compensation package.
However, in the early stages of a Start Up and particularly in one that has not yet sought or obtained significant fundraising, setting up an employee share scheme has its difficulties. Legal advice can get expensive, employees may not have the cash available to pay large sums of tax up front, and whilst Start Ups are likely to qualify for approved schemes such as EMI, SIP or CSOP, their flexibility in terms of capital structure means they may also benefit from Growth Shares or JSOPs where participation is linked to the Company value reaching a particular threshold. They may also wish to offer equity incentives to non-employees, requiring an unapproved option scheme.
Navigating the range of different options and which suits the company’s structure and intentions can become a daunting task.
In designing a scheme for Start Ups, there are a number of factors which influence design.
Chief among such considerations is which development stage the Start Up is in: whether it has a proven product, generates revenue, has obtained fundraising, and so on. The existing share capital structure and what kind of dilution is reasonable for the founders and any investors is also a key concern for many Start Ups.
There may also be a need for performance targets or time based vesting, for all or some participants, and the company might wish to have their employee equity participation linked to reaching key development milestones.
Assessing the value of a Start Up business can also be a complex endeavour, as traditional valuation methodologies often rely on an earnings figure which evidently a Start Up not yet making profits cannot provide.
At Pett Franklin our knowledge of valuation, tax, share scheme design and project management experience allows us to design and implement a scheme to fit a Start Up business and navigate through these questions.