The Notion Of Notional Values — P1
Assessing an effective employee option scheme
Disclaimer: I am a business owner and not an accredited legal for financial advisor. All opinions are my own and I cannot be held accountable for action taken against them.
CrowdEmotion lives at the intersection of people and technology. This four part blog series explores our considerations around equity based motivations to drive innovation through diversity and collaboration in the UK tax system.
Part 1: What is an options scheme?
Part 2: How should our share options work?
Share options? Every startup has them. But, should they?
I suggest anyone considering equity offers of any sort to first truly explore the motivations of your current staff and future role hires aligned to company purpose, goals, and objectives.
As a North American with an aim to have 19% of the company owned by employees, I learned a lot.
In this post, I cover what we did to empower employees, build loyalty, and align motivations with company purpose and goals. I hope you take away some useful tips, considerations, and at the very least, questions you should ask to discover if share options are right for you and your company.
Reasons for consideration:
- Private valuations are estimated, not market validated — so employee shareholder notional values can easily fall short.
- De-motivation of unequal shares — if you do prefs v common, you highlight yet another way people are unequal in the company that isn’t performance based (ie. they can’t change their advantage) — this can be dealt with, but goes against teamwork and collaboration
- Simple is better — the fact you are reading this raises whether the complexity is worth it for you and your employees.
At CrowdEmotion, we took 6 months early on to understand share options.
Background:
CrowdEmotion sits at the intersection of people and technology. Our software blends best in breed academic IP with our proprietary artificial intelligence system to promoting human evolution in mutual understanding, relationships, creativity, and abstract thought. In short, we enable people to add measured emotions to their everyday lives.
For the purposes of this post, we are a company that focuses on IP based profitability. We do this by blending a diverse talent group of smart PhDs with young, curious people who promote individuality in a digital world. In the beginning, we bootstrapped at just above minimum wage and needed risk takers to join us. Soon, we will run a 3 tier equal pay structure (team members, team leads, team execs) where base salaries are public and above market rates. We also share profits.
I recently had a good debate with our board on share options and what they are truly intended to drive: performance? loyalty? tenure?
1/ What is an options scheme?
If you know, skip to “My First Thought:”
Disclaimer: I’m not a financial advisor and please seek your own outside definition for clarity. Here’s a link for numbers people, and here for a lot more detail and here if you are in the uk.
I look at it as basically putting a reservation on equity of the company, sometimes at a favourable price with no idea if the value will be better, worse or the same — yet you might have some influence on said value.
I think of it like reserving a table and set menu with a discount voucher where you know the restaurant owner. You set the reservation, commit to paying and eventually you are seated and over time you realise the value of each course finishing with you paying the price regardless of how the meal turned out (hopefully amazing). If you leave in the middle, you still pay the price realising only part of the meal or getting a “to-go” box… and so on.
So for us, if we’re going to open up seats at the table and take reservations, we need to think about how and why team members take part so they get the most reward.
This is more complex than it seems.
My first thought:
Things called “schemes” by the government means complicated where the little person has a high chance to lose…that’s a debate for another time.
Anything complex can kill a small company quickly. So, I first need to determine whether the effort is worth it. Two questions I used:
Why are we putting a share options plan in place?
What motivates our team today and tomorrow?
These may seem like simple questions, but need to be considered carefully. We dug into this and found share options provide very specific motivations for very specific types of people. One size fits all sounds great from a management and tax standpoint, but might not be best for the culture or individuals of the company.
Our Answers:
Why are we putting a share options plan in place?
- Founding team is “family” — we wanted family to earn ownership
- Higher risk threshold — we needed people who could earn more elsewhere, but were excited by the potential and purpose
- Purpose — we needed to tangibly reward our purpose
- Equity is earned, not given —true buy-in requires skin in the game
What motivates our team today and tomorrow?
Today — we need the core team to come on board and have an abnormally high level of perseverance. So we needed longer term thinkers. Share options are for people who invest in the long term and can see that purpose and reward lining up.
Tomorrow — once we hit sustained growth and profitability, we need people to fill less exciting innovation roles, yet still contribute in a massive way. Share options are not for everyone. The ultimate goal is to help people achieve their life objectives. So we need to offer cash and choice.
Up Next: How should our share options work?
I hope you found this useful. Every company is different and the simple exercise of answering some of these questions can unveil a lot about your employees methods for making decisions, risk propensities, and value drivers for motivation.
About Me:
The benefit of being 33 and starting a company after 10 years in corporate life is you understand the receiving end of things like share options and buying into private companies. To add to the fun, I am Canadian having worked in a North American (NA) style tech startup. I decided to start my company in the UK with a Canadian culture… under UK tax guidelines. Square peg <> round hole.
