One of the most common conversations we have with business owners is not about tax, compliance or governance. It’s about people.
More specifically: “How do I incentivise key management without giving away the value I’ve spent years building?”
For many founders and entrepreneurs, their business represents decades of hard work, long hours, risk and sacrifice. As the business grows, however, there often comes a point where they need to bring key employees, executives or future leaders more closely into the success of the business.
The challenge is finding a way to do this that is both commercially fair and sustainable.
Too often, the immediate solution is simply to issue shares. While that may work in some circumstances, it can also create unintended consequences. Existing shareholders may be diluted and new participants may immediately benefit from value that was created long before they became involved in the business.
Fortunately, there is no “one-size-fits-all” approach.
Depending on the objectives of the business, there are a number of mechanisms that may be considered, including:
- Direct equity participation;
- Share option schemes;
- Share appreciation rights;
- Phantom share arrangements;
- Growth share structures; and
- Bespoke shareholder and succession planning structures.
The most effective solution is often one that balances three competing interests, namely, rewarding future contribution, protecting existing shareholder value and creating long-term alignment between management and ownership.
What is often overlooked is that these arrangements involve far more than simply issuing shares. The legal, tax and governance considerations are critical to ensuring that the structure achieves its intended outcome and does not create unintended consequences down the line.
Every business is different. A solution that works perfectly for a start-up may be entirely inappropriate for a mature family business or an established company planning for succession.
If your business is considering ways to incentivise key management, retain talent, facilitate succession planning or realign future participation, it is worth obtaining advice before implementing a structure.
A properly designed incentive structure can become one of the most powerful tools for driving growth while preserving the value that has already been created.
If this is a conversation your business is starting to have, feel free to reach out to our Corporate & Commercial team. We’d be happy to discuss the options available and help identify a solution that aligns with your commercial objectives.