What do you need to consider when creating your first equity scheme?
Equity is a fundamental component of any serious growth strategy, but many don't understand it or feel that it's something best left in the hands of accountants.
However, once you sit down and engage with what equity is, it actually isn’t that hard to understand. It’s also pretty valuable to get a handle on how you can use this powerful resource to drive productivity and reward throughout your company.
We caught up with Vestd’s CEO and founder, Ifty Nasir, to get the lowdown on what it is and how business leaders can use it to get ahead of the competition. As the UK’s number one digital equity platform, Vestd’s experts have seen almost every equity arrangement possible and as such, Ifty has unrivalled knowledge in the sphere.
Hi Ifty, and thanks for joining us today. Let’s start at the beginning. What, in a nutshell, is equity?
Well, put simply, equity is the ownership of a company, the shares. Thinking of the company as a cake...each share is a tiny slice.
The most common example of deploying equity is when you issue new shares to someone who invests money in the company. That might not be worth much when you start out but could grow into something of monetary value over time.
Equity is a valuable tool for growth for many, many reasons.
Tell us more…
Your equity is sitting there as a resource to be used and you can use it as a bargaining chip or a motivator.
So for example, you can offer your existing team equity and not only will this align their efforts but it will also enhance their loyalty, drive and ambition.
Equally, if you are trying to attract people with specialist skills, you could add equity to their compensation package to make your offer more attractive than that of competitors. This can be especially useful for younger companies or for those with pockets not quite as deep as others vying for the same talent.
By being able to attract the right talent at the right time, you can realise your goals more quickly, mitigate against poor concepts and build your in-house knowledge.
You can also take the pressure out of cash-flow problems by rewarding mentors and specialists with equity, to help you to get you through lean times as quickly as possible.
There’s just so much you can do once you know how to manage your equity correctly.
And is that a steep learning curve?
No, not at all. It used to be and that’s why setting up and managing share schemes used to be the preserve of accountants and solicitors.
But with a digital platform like Vestd, you can easily get up and running without external and expensive help. As a ‘guided SaaS’ business, we help our customers every step of the way and once they are all set up, it’s very straightforward to manage.
The platform is also a joy to manage because you can clearly see the distribution of your equity, and your share and option holders can see the value of their shares or options in real time, which acts as a great incentive.
What’s the difference between shares and options?
It’s actually really straightforward. If you hold shares, you hold shares in the company. You can sell them, or if there is an exit event (such as the company being sold for example), you’ll get your cut of the profit.
By offering somebody ‘Options’, you are inviting them to buy shares at a later date but at a pre-agreed price.
This might sound less of a reward on the face of it, but it’s actually the most tax-efficient option for most people so for that reason, it’s the most common form of equity offered in company share schemes.
What if you offered somebody equity and they didn’t perform, or worse, they left in bad circumstances? Can they just take their equity?
No, absolutely no. There are loads of mechanisms to prevent this from happening.
Firstly, it’s possible with most scheme types to offer ‘conditional equity’ and what that means is that you can set terms or milestones that have to be hit for the reward to be released. So for example, that they need to stay with the company for five years or pull X amount of new sales over the line.
Secondly, you can include bad leaver clauses in your contract to ensure that if they leave under a cloud, that they will forfeit their reward. Equally, you have the discretion to include good leaver clauses to ensure that they get their reward if they leave under circumstances beyond their control (illness for example).
Ultimately, all of the control lies with you and if you set everything up correctly, you can only stand to gain from offering equity.
It all sounds good, but is it expensive?
No! I set up Vestd to remove barriers to business growth by making equity management as accessible as possible.
For that reason, we operate a subscription model with no hidden charges and our prices start at just £100 per month for 1-10 people.
Perfect, thanks Ifty!
