Everything You Need to Know About Managing Your Equity

One mistake new founders make is reserving equity purely for investment. Believe it or not, equity is the key to unlocking a whole lot more.

Startups can leverage equity to attract talent, boost team productivity, and increase the overall future value of the business. But don’t just take our word for it. A popular way to unlock its potential is with an employee share or option scheme.

Managing those kinds of schemes is easier than you think. Or at least it can be. Employee share schemes used to have a bad rep; considered costly and overly complicated to set up. Typically involving a lot of back and forth with both accountants and lawyers.

Thankfully, there’s now a much simpler way of setting up, allocating and managing a team’s shares and options. A digital equity management platform is by far the easiest way to distribute and manage equity.

Vestd is the UK’s first and only regulated digital share scheme platform. We’ve helped thousands of startups motivate their teams by giving them skin in the game. So, we know a thing or two about good equity management.

So, we’ve put together an introductory guide aimed at first-time founders. It covers equity basics, things to consider when deciding what to do with your equity, a quick look at the different UK employee share schemes and best practices.

Understanding shares and options

Unless you’ve already set up a company, you may not have a firm understanding of shares and options. And that’s OK! To cover all bases, we’re going to start with the basics.

Shares

Assuming you’re setting up a limited company, your business will be split into a certain number of shares as decided at the time of incorporation. Imagine a large pie sliced. Some founders keep the whole pie to themselves. But, more often than not, their partners and (or) co-founder(s) get a slice of the pie too.

Shareholders have certain rights, as set out in a company’s Articles of Association. And shareholder details are captured in what’s commonly called a cap table. Note: it’s important to keep track of your cap table over time.

Options

Generally speaking, shares are issued immediately meaning that the recipients become shareholders straight away. Often, that means they can access all the rights and perks that come with it. Options are a bit different.

Founders can award options instead of shares. Recipients awarded options have the right (but not the obligation) to convert (exercise) their options into shares at a later date (or on exit), at a pre-agreed price. Until that point, options go through what’s called a ‘vesting’ period.

Essentially, options are like shares in waiting.

As part of awarding someone options, you can set specific conditions to meet before that person can exercise their options. So you’re not giving away precious equity without something in return. That could be loyalty to the business or the completion of a performance-based milestone, for instance.

Note: there’s much more to shares and options than what we’ve touched on so far. But, for the sake of this guide, we’re keeping it brief. Our free equity fundamentals guide covers the basics of shares and options in more detail, so be sure to check that out.

Why share equity with my team?

Before you decide what to do with your equity, let’s quickly recap why it’s a good idea to share equity in the first place. Not just with angels and VCs in exchange for investment, but with the team too.

More and more startups and SMEs are discovering the benefits of sharing equity with the team. And (depending on the scheme) advisors, consultants and contractors too. Recent stats show that since 2010 the number of UK share schemes has soared by 77%.

But what’s so great about employee share and option schemes? Here are the top reasons why companies launch share schemes:

1. To attract the best talent
2. Retain the best talent
3. Increase productivity and performance
4. Improve employee engagement and happiness
5. Preserve cash flow
6. And increase overall business value.

It’s all linked to The Ownership Effect. Studies have shown that someone with even just a small stake in a company is more likely to stick around, give it their all and contribute to the success of the business.

Plan how you’ll share equity

Clearly, equity is a powerful incentive. But before you give equity away, you should think carefully about the following:

1. How many shares/options to give to people
2. What vesting schedule to set
3. When the team can access their shares
4. The kind of conditions you want to set
5. The price of the shares and tax implication
6. And what happens if someone leaves.

Keep the above in mind as it will help you determine what employee share scheme to choose and the conditions you put in place.

The different types of share scheme

How you’ll share equity depends on the type of share scheme your business is eligible for and your specific business needs. Every company is unique so we won’t go into too much detail.

In short, there are four HMRC-approved share schemes and six ‘unapproved’ methods of sharing equity.

HMRC-approved schemes like Enterprise Management Incentives are tax-advantageous and tailored to UK SMEs. And unapproved methods, like Growth Shares, tend to be more flexible. Don’t worry, there’s nothing untoward about ‘unapproved’ schemes; ‘unapproved’ just means that there’s minimal involvement with HMRC.

Take a look at our employee share schemes guide for more details on the different types of schemes available to UK-based businesses. It’s up to you to decide what’s best for your business.

How best to manage your equity

We’ve covered equity basics, why it’s great to share, factors to consider and briefly touched on the different share schemes. But what’s the best way to go about it?

As we touched on earlier, the traditional way of sharing equity can be a real headache and amount to a lot of paperwork. Digital equity management platforms make setting up and managing a scheme much simpler.

How so? Well, with Vestd you can:

• Say goodbye to paperwork and design a compliant scheme online (or even digitise an existing scheme)
• Set conditions to give you peace of mind
• Save time by auto-generating agreements that recipients can sign electronically
• Safely store all signed copies and other documents (so nothing gets lost)
• Receive reminders to complete actions and/or notify HMRC (if applicable)
• Keep tabs with a real-time cap table
• Visualise your equity and who has what
• And much more.

Just on visibility, it’s all too easy for recipients to file away a paper agreement in a drawer somewhere and forget about it. For your employee share scheme to really motivate the team, they need to understand the value of having shares (and be regularly reminded).

On Vestd, recipients have access to their own portal with a dynamic dashboard that displays their shares/options as they vest. They can even add a projected share price to understand the future potential of their shares. With a digital platform, they can see what the pot is and what it might be worth later down the line.

More accessible and less hassle, a digital equity management platform is the way to go. We hope you’ve found our introduction to equity management useful.