I get a lot of calls from people looking for advice on how to give away shares in their company. Often people ask about giving share options, so I wanted to talk briefly about the difference between share options and shares, and why share options are not such a good idea for small businesses.
Share options vs shares
Share options are great for bigger companies with lots of staff. It’s a way of saying to staff, “When the company gets bigger, in a few years time, you can have the option of buying some shares at a pre-agreed price. That price will usually be cheaper than if you buy the shares at the time.” Staff like this idea because they have an incentive to work hard, and will see some of the upside when the company is worth something.
So if you’ve got a company that you know is going to be the next Google, and you’ve already got quite a few staff, and some money in the bank, this is a good option for you. But share option schemes are expensive to set up because they’re more complicated and therefore need more lawyer and tax accountant time. In one of my previous businesses, we fell for the share option hype, but because it was so costly and complex, we never got round to actually setting up the scheme, and I reckon the staff thought we were a little flaky for not following through on our promises.
I specialise in helping businesses which have less than 30 employees, and most of my clients won’t ever go for floating on the stock exchange or even growing past the 100 employee level. That’s not what they’re interested in.
Most of the companies I work with are interested in growing to the level where the owner can make some decent money, enjoy what they’re doing and feel that they’ve created something useful and sustainable. Often, they want to bring in one or two people at a high level, often with expertise and experience in their sector, and get them on board. For these businesses, it’s much better to just give a chunk of the equity in the business to a couple of people. Maybe they’re going to invest, maybe you just want them to work hard in the business, or you want to reward the people who are making a big contribution.
In this situation it’s better to give those people shares directly, and sign a shareholders’ agreement to protect yourself if they leave or get run over by a bus. Much less complicated than messing around with options, cheaper, and it gets done.
If you need some help with shares in your business
I do quite a lot of work in this area, so if you’d like to talk about what’s the best option (excuse the pun) for your business, think about booking one of my business decision making sessions. It could save you hours of thinking about this, and thousands in legal fees.