How to Give Business Shares To Your Employees

Employee motivation remains a key aspect of your business. However, giving out shares as a reward equates to ceding part of your company. Though a positive move in the sight of your employees, there are some critical concerns that you should analyze.

Some of the risks that are associated with giving shares to employees include: –

  • Company secrets may be at risk.
  • It erodes the per value of shares.
  • Additional expenses to acquire them back.
  • Risk of conflicts when employees leave.
business stock

When the company is not performing well or during bad financial times, employee motivation can be achieved by way of giving shares. This can also be used to attract and retain top talent.

What modalities can you use to give employees shares?

Here are some ways to execute this reward system 

1. Decide on How to Reserve the Equity Plan

This can be discussed during a shareholders meeting to develop a consensus on the matter. These are some possible solutions that can be weighed: –

  • Issuance of new shares- It involves creating a new class of shares. This can shield existing shareholders from tax liabilities which normally arises if they choose to give a part of the existing shares
  • Allocate shares from an existing class of shares- By using the authorized share capacity, a new class of shares can be issued to execute this plan.
  • Institute qualification criteria- This can either be several years worked, waiting period, performance metrics, and any other metrics. 

When planning to execute the issue, it is important to disclose to shareholders the full details about possible tax liabilities, dilution of value, and any other effect. 

2. Administering the Plan

Depending on the size of the company, it is important to have a solid management system for this scheme. Creating an online platform can help you manage the scheme better. These are some of the reasons you need a solid system to manage this scheme: –

  • Eliminate paperwork- For big companies with thousands of employees, qualifying individual staff manually can be tedious. The system helps keep an updated database on the files.
  • Manage share transfer and Exit Plans- Developing a robust system capable of handling transactions of the shares is beneficial. This includes internal transfers and sale requests

A management system is important as it can provide a point of audit quickly.

3. Institute Measures to Protect Shareholders and the Company

As mentioned above there are risks associated with this move. It is therefore important to work closely with a management consultant and a legal team to craft the scheme. Below are some measures to enhance protection: –

  • Putting a cap on the rights of the holder- Creating a policy that clearly defines what rights the holders have is crucial. This includes voting rights, access to crucial information and any responsibility is crucial.
  • Exit rights- It is important to define in the articles what will happen should an employee leave. This can include clauses that further restrict the rights of shareholders after leaving to avoid any sabotage after leaving the company.

The exit rights could also be flexible depending on the reason for exit e.g. disability or incapacitation.

4. Some of the Available Equity Plans 

Equity compensation involves gifting shares to employees with or without cash. It can also be issued with a pre-determined discounted price. This option to acquire shares can be vested—meaning there are conditions to be met before redeeming them.

Below are some of the available plans: –

  • Restricted Stock Unit- This specifically utilizes a vesting plan. Employees exercise or redeem the right to acquire after achieving a certain threshold. This can be performance targets or after passing a test of loyalty.

Restricted units have a deferred value. After meeting the metric for instance 10 years working for the company. The share assumes its value which can then be redeemed through a sale.

  • Employee Stock Ownership Plan- This scheme gives unrestricted ownership to the company. This plan helps employees acquire full shareholder rights, who in turn appreciate the responsibility. This normally propels employees to improve their performance.

This plan has tax benefits to current shareholders which is a great incentive to issue them.

This plan is used to secure interest in the company and enhancing succession planning.

Equity compensation plans can help incentivize employees but at the same time promote the agenda of the company like the going concern.

Business Shares Conclusion

Business shares is a great way to enhance trust from your employees while keeping them motivated. However, with respect to existing shareholders, it’s great to craft ways that can protect them.

On the other hand, investing in a quality management system can help administer the plan successfully.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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