USING EQUITY INCENTIVISATION TO MAXIMISE EXIT VALUE
As discussed in previous blogs, tying in key talent is crucial both to the short term success of your business and to the exit value. Equity incentivisation can be an extremely effective way to achieve this.
What type of share scheme – Typically companies will issue employees they want to incentivise with B class shares as part of an Enterprise Management Incentive (EMI) share option plan. This type of share gives the employee no dividend or voting rights and they have to return the shares if they leave before the company event i.e. sale.
How much should you give away and to whom – while equity can be a very effective way to retain key talent, every share that you give away will leave you with a fraction less money when you sell the company. When giving away equity the decision should be whether doing so will generate you more money than you will be sacrificing i.e. a small percentage of a bigger pie.
Setting targets for equity release – rather than providing employees with equity as a reward for doing a good job retrospectively, it is also possible to use equity as a performance related incentive. Typically employees would earn equity by achieving specific pre-agreed targets however this might also be dependent on the overall company performance as well.
Structuring equity incentivisation – many employers offer shares in waves i.e. employees can build up a pot by adding more to it on an annual basis based on them, and sometimes also the company, hitting pre-agreed targets. Whatever you do, do not promise and then not deliver as this is a sure fire way to lose key staff and it happens more often than you would think especially when the majority shareholders have a sale in sight and can get greedy / don’t want to give those pre-agreed share waves away. What if the sale doesn’t happen and key people leave? What if that person is interviewed in the due diligence process by the potential purchaser and signals their intent to leave? What if there is an earn-out and this person leaves making your earn out figure less likely to be achieved? This can be very short sighted as you will normally want to tie in key people post sale and prove that you have done so.
Buying in staff to scheme – many recruiters are most easily incentivised by short term and related incentive schemes such as commission and bonus payments. For the share scheme to be effective you will likely need to demonstrate the potential returns to staff and the timescales you envisage applying to them seeing the benefits arise from the scheme. Don’t sell them a fantasy! Show them a credible plan, talk them through some high level detail to back-up that credibility and then show them how their shares will increase in value based on both a realistic and stretch basis. This will be more motivational as they will believe in how it will benefit them longer term.