Locking in key employees into the business is an important driver for the growth of your business. This is very different to having robust restrictive covenants and garden leave provisions in the contracts of employment for your key employees. These are important but they are there to protect the value of the business if the key employee were to leave. They do not incentivise key employees to stay. Giving them a proportion of the equity in your business does incentivise them to stay for that all important exit.

Owners are sometimes unsure as to how much of the equity they should allow the key employees to have. How much is enough to motivate your key employees to drive growth?

10% of the equity for just one or two key employees would be in line with best practice for listed companies, but it may vary from sector to sector for private company owners, depending on the competition for talent.

To help you determine an appropriate amount you might want to think about ;

1. What sum of money would you want your key employees to receive on a sale (assuming the sale of the Company is expected in the short to medium term)? You could put a cap on the amount received so it becomes irrelevant how many shares and therefore, what percentage of the equity , the key employee holds
2. What percentage would you want your key employee to have on a sale if she/he had helped drive value above a certain threshold? Up to that threshold you would have 100% of the proceeds of sale of the business and over that threshold you might feel more generous towards them in terms of sharing the balance
3. What performance conditions do you want your key employees to achieve before any of the equity would vest in them? If they don’t achieve the performance conditions, the percentage of the equity you are sacrificing in their favour, again becomes irrelevant

You don’t need to lose control or income in favour of your key employees. By granting them options over shares which are exercisable only on an exit means they become shareholders for a very short time immediately prior to the sale. Alternatively, you give them shares which don’t have any voting rights or right to dividends. All share plans should include provisions which determine what is to happen to the shares if the key employee was to leave prior to an exit.

Geldards are experts an implementing shares schemes for their clients and if you would like to know more please contact : Debra Martin at debra.martin@geldards.com