Advantages of giving shares to your employees
Is giving shares to employees a good resource?
In this article we want to explain the advantages of giving shares to your employees if the financial resources of the company are not enough, for example, to hire capital trained human.
Do you lack economic resources to attract the most qualified human capital?
You are looking for talented people to incorporate into your startup or to a newly created department of your company and you need employees who are trained to fill that vacancy, but you have not yet generated sufficient financial resources to offer a remuneration commensurate with the position.
You even find it difficult for those selected in recruitment processes to accept your job offer.
If this is your situation, you can solve the financial hurdle by offering shares to your senior employees.
Giving up part of your shareholding to your most important employees might be a good idea. Without a doubt, it can serve as an attraction to attract the talent you need. Also as an incentive to achieve optimal performance of the most determined employees.
In startups, more hours are worked than in other companies and with less salary. Somehow you have to compensate for this imbalance between what the employee contributes and what the entrepreneur can one day achieve thanks to the efforts of those around him.
Once we have decided to get rid of part of our shareholding to transfer it to new partners or several of our employees, we must choose the best way to do it.
There are several formulas to achieve the goal pursued, the ideal is to know first-hand the specific case before advising on it. We are going to analyze below the most frequent ways to execute the incentive plan .
Incentive plans through shares
Make an employee a partner in your company or startup
Sometimes the talent is at home, the difficult thing is to retain it when the employee has acquired enough knowledge to take a leap in their professional projection. Many companies resort to the formula of converting the employee into a partner, even with very little capital, to achieve their loyalty.
This step should be taken once the company has verified that the worker is profitable, converting a newly integrated employee into the team as a partner is an unwise risk.
Once the decision has been made, the sale of shares can be committed at a certain price. It can be done immediately or committed to the fulfillment of a future objective by including a conditional clause.
It is convenient to impose on the employee a commitment to sell the shares at a certain price in case of leaving the company.
Delivery of shares with “vesting”
The term “vesting” is commonly used in startups when trying to attract a new partner to the project. Their conditions are usually reflected in the partners agreement.
Through vesting the partner is given a number of shares but does not receive them immediately. A transition period called “cliff” is agreed upon, in which periodic deliveries of shares are made in compliance with objectives and a commitment to permanence.
In this way, the company encourages the partner both in his performance and in the commitment to prolong his involvement in the project over time. Normally the recipient of the shares is required to sell them to the rest of the partners once they decide to leave the company.
Stock options
Stock options is an anglicism that means “stock options” and works as a compensation mechanism for employees, usually managers . It consists of an offer by the company, which undertakes for a certain period of time to facilitate the purchase of shares at a lower price than the market price.
Initially the employee does not receive the shares but the right of future acquisition. Normally a long-term compensation plan is planned and the employee or manager receives the stock options as the company achieves certain objectives. The beneficiary of the stock options can obtain significant profits if the stock appreciates in the market.
It is convenient to take into account the fiscal impact for the executive who receives the stock options. If the employee pays, for example, €10 for each share when they really have a market value of €100, the Treasury will always take into account the market value (€100) for the calculation of income in personal income tax. So the employee will have to pay these amounts as if he had received them as salary.
Phantom shares
phantom shares are a useful method of incentives. In this case, the employee never gets to receive the shares, it is about remunerating the employee as if he had shares but without actually having them. In other words, fictitious shares are delivered, hence the name “ghost shares”, with the company’s commitment to pay the salary corresponding to the dividends that any partner would have received. p>
Let’s say that phantom shares worth 5% of the company are delivered. In a distribution of annual dividends of 200,000 euros, the employee would receive 5% of those dividends as salary, that is, 10,000 euros.
Indeed, the beneficiary of phantom shares never acquires partner status, and therefore will not have the rights granted by the Capital Companies Law, such as the right to vote in general meetings, the right to information, etc.
This is an added advantage for the employer who is looking for the formula to encourage his staff without having to cede other rights.
The ideal solution
There is no one-size-fits-all solution. The size of the company, the prospects for growth and the invested capital are some of the parameters that should be taken into account before deciding on the most appropriate formula.
The employee, manager or shareholder beneficiary of the shares will also receive the offer made to them with greater or lesser interest, taking into account the particularities of the business.
There is no point in offering phantom shares in a company that never distributes dividends, as the employee will not get any incentive, in the same way as giving stock options may be meaningless if the company’s valuation has been declining in recent years with no real prospects for change.
The only real option to execute an incentive plan of this nature guaranteeing its success is to analyze the specific case and develop a personalized program for the company in question.
