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Share options based on salary sacrifice

Discussion in 'Business Advice for Start-ups' started by Hubert Bloom, Apr 20, 2016.

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    Hubert Bloom

    Hubert Bloom Applicant

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    I have recently taken on my first employee. Company is a Ltd. co.

    I want to agree a share option scheme with him as an incentive. He has agreed to work for a lower salary than he could otherwise command. I calculated that based on salary sacrifice alone his share should be 5 - 10% of equity. He is now arguing for more than this.

    I would be grateful if people could contribute opinions on what the arguments for/against his position are... Am I being unreasonable?

    Thanks HB
     
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    Duncan

    Duncan Moderator Staff Member Premium Member

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    Ask him to set out his thinking in writing with numbers then you can compare it to your thinking with numbers.

    You need to think about what rights you want him to have as well as value and agree (in a shareholder agreement) how you value them and if/when he can sell and who too and if/when you can buy them from him.

    Begin with the end in mind.

    Workout the commercial arrangement BEFORE you ask a lawyer to write it down. They are expensive commercial advice otherwise!
     
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    Hubert Bloom

    Hubert Bloom Applicant

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    I was more asking about non monitary aspects. Like I'm the founder, all the customers are my contacts etc... etc... so the founders share should be more than indicated by salary sacrifice alone. Any thoughts?
     
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    Duncan

    Duncan Moderator Staff Member Premium Member

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    But it IS all about money. 100% of nothing is nothing 2% 0f £10,000,000 is £200,000 so percentage debates without numbers are all about emotion and gut feel. You are right you bring more than your labour, it is your capital at risk and you created the business. Your employer is just a hired hand so salary sacrifice is logical.

    My personal experience in large and small companies is that share related remuneration is an expensive waste of time. The one exception is where an owner manager is deliberately handing the business over to the next generation (not necessarily relatives) in a phased and organised way.
     
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    Marketing Quotes

    Marketing Quotes Freshman

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    Brace yourself, tough love is a' coming your way.

    You're the founder. You get to keep the lions share, period. I would think very hard about handing out equity only because you can't pay your employee or think it's reasonable to trade a short-term gain for a long-term loss. If the only thing that employee brings to the table is his time, he should be compensated for his time and that's it.
    You can incentivize him with % of sales, and if it's a service business, then he could get % of repetitive business as well. There are a lot of ways to incentivize your employees that are far better and make more sense than hanging out equity in your company.

    He's not a co-founder. He's an employee. You're the boss, so stop letting him make demands. It's okay to back out on your offer. No explanations required.
    You created your biz so that you could set the rules. There is no being unreasonable. Stop being a wuss and man up.

    Imagine if you had 10 of employees like this one. You calculated that his SACRIFICE(the words you use make me throw up in my mouth) is worth 10%. So what? Would you give your whole company away to 10 employees because they sacrifice something? boo hoo... Either incentivize them in other way or find someone who is willing to work for less than he is. you could even get free labour or almost free by framing it as an educational experience and get some fresh out of college youngsters to do your bidding.

    Get your mind right!
     
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    Paul Norman

    Paul Norman Businessman

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    A share scheme as a salary sacrifice seems a worrying idea at this very early stage.

    Most businesses, in the early years of their existence, have little real value in their shares, if any at all. Personally, I suspect your employee may be right.

    I would steer clear, unless your shares have a clear, and proveable, market value - not based on aspiration and future potential. Pay the staff member the market rate, and keep this conversation for later.

    Of course, I could be wrong. To know, I would need to see three years published accounts for your business showing the shareholder value.
     
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    Paul Norman

    Paul Norman Businessman

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    I have to say it is this thinking that ensures that few small businesses become larger ones.
     
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    Maevla

    Maevla Administrator Staff Member

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    Why would you need an incentive for an employee you just took on, is he not working hard enough? The fact that you are already asking about whether you think people think you unreasonable should answer your question, you have reservations about this guy - and he is new - what happens if you give him more shares and you continue to grow and he stops working?

    Keep the shares and find a different incentive such as a bonus scheme to begin with.
     
    Marketing Quotes likes this.

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