Should I equity share to retain staff?

Hi Aunty B. (What an awesome column yesterday).

I have had staff come from a large multinational company into my small, but growing company (and one even travels from Gosford to south west Sydney daily). What is the best way to retain staff without killing the business? I would like to provide them with a slice of the business however does that mean I have to pass everything I purchased by them (for example, vehicles and general expenses)?

Also, what does it mean if they leave? I don’t want them to continue being rewarded after leaving. Is there a simple solution I am missing?

Mark P,
Wetherill Park NSW

Hi Mark,

You are right – about the column – and what you are proposing. Handing employees a slice of the business is complicated and very few small and medium businesses use employee share schemes.

Think of it like this. You want to offer staff a slice of the business; that is to give staff equity in the business. But it is far easier to put incentive schemes around revenue than equity.

There are a number of reasons for this. Many privately run businesses want to stay that way. They don’t want to seek shareholder approval every time they sneeze. Privately, many entrepreneurs say they regret giving staff equity because the staff still operate with an employee mentality and can make decisions based in their best interests and not in the best interests of the company.

Many business owners also don’t want employees to have a free rein in the books and to know all the ins and outs of the business.

By giving staff equity you are also handing to your employees everything you have already built up, so they are sharing in the past success (which includes all assets such as the vehicles and general expenses etc) – a success to which they may not have made a contribution.

You ask what it means when an employee leaves. In that situation the shares are usually redeemed (that is written into the agreement). But that too causes problems. As the shares are not listed, there is no ready market tool to value the shares, so you have to seek independent valuations. Then of course someone must buy those shares and entrepreneurs also tell me that can be annoying because they had their capital tied up elsewhere at the time a staff member left and wanted to sell.

There is one other problem. To get the tax benefits you need to make the share scheme widely available to your staff. Again this has drawbacks. You will want to retain key staff but there will be some staff that you will not want included in the agreement.

Some companies do offer equity to their staff, often through offering share options linked to incentives. But they are usually quite sophisticated companies working on a float down the track.

Many business owners also offer employees a slice of the business when they are doing succession planning and want the business to go to key staff. But it is not generally used to retain key staff.

The simple solution you are missing is, in my opinion, profit share. Set some incentives and when they are met, share profit with key employees. Use bonuses and non-financial benefits such as surprise holidays etc to delight your staff. And remind them of the vision, and the challenge.

Good luck,

Your Aunty B