Six things to know before you give shares or share options to employees

January 2011

Page Director

We spend lots of time talking to clients about issuing shares and options to employees. This is particularly the case with young companies which often want to attract and retain ambitious staff but don’t have the money to pay market rate salaries. 

There is plenty of detail that goes with this but the aim of this post is just to highlight a few points you should think about. 

The theory is that giving employees shares/options will give employees a sense of ownership.  This should make them more committed and loyal to the business and might persuade them to accept lower salaries than they would do at a more established business.

However, commitment and loyalty will be driven by many other factors and, importantly, if you aren’t careful giving employees shares and options can create new problems.  So here are some of the things you need to think about:

  • Motivation: different employees will be motivated by different things: owning shares may motivate some employees but not others. 
  • Working environment: if the working environment isn’t right giving shares and options is unlikely to improve employee motivation and commitment.   
  • Avoid division: issuing shares and granting options tends to be fairly visible, often more so than salary levels.  Be aware of this and manage things so that they don’t become a source of tension and division.
  • Don’t end up with too many shareholders: some modestly sized private companies issue lots of shares to lots of people and end up with unwieldy an shareholder base which costs time and money to manage.
  • What happens if people leave:  if employees are going to hold shares think about what happens if they leave.   If past employees hold shares then they are not available for current employees so think about whether people should be obliged to transfer their shares if they leave.
  • Get the detail right:  it is very easy to inadvertently trip up on a technical legal or accounting issue when granting some shares or options.  We would say this, wouldn’t we, but take some legal or accountancy advice before you issue any shares or grant any options.

There is no right answer as to how best to retain and motivate staff, issuing shares and options might be part of the answer but it’s rarely the complete answer.

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