How to set up employee share schemes

At Capdesk we believe every company should combine a steady pay with co-ownership in the company. Giving employees co-ownership in the company can increase motivation and incentivise them to work harder, but employee share schemes can be tricky to handle - luckily we're here to help! 

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At Capdesk we see a lot of cap tables, shareholder registers and employee share plans - many of them are full of mistakes. As part of our onboarding process we clean and correct the company data to ensure the data is 100% correct before importing it to the Capdesk platform. If you would like to avoid mistakes in your cap table, shareholder registers and employee share schemes, consider using our platform for you company data. Get started.

For a complete introduction to employee share schemes please download our guide

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Here you'll find a few insights from the guide:

1. Why give employees shares? 

There can be numerous reasons for giving employees co-ownership of your company. We have tried to list a few below: 

Why give employees equity

 

2. Definition of an employee share scheme

An employee share scheme is a structured way of sharing ownership in a company with the employees. It is completely up to the management of the company to decide if they want to give ownership to none of their employees, some of them (potentially key hires) or maybe even all of them. 

It is also possible to give shares to people outside your organisation, such as advisors and consultants, however in most cases it would make sense to run two separate schemes - one for internal people and one for external people.

Once you know who to give equity to, the next step is to figure out which type of equity might be right for your particular setup. Below you'll find the most commonly used versions of employee equity: 

Options (ESOs)
A contract granting employees the right to buy a certain number of company shares at a predetermined price, within a specific time window.

Warrants
A type of option, but issued directly by the company. Therefore, when exercised, the shares corresponding to the warrants are received by the company rather than another investor. 

Phantom Shares (Virtual Shares/VSPs)
Gives holders the right to a cash payment corresponding to the market value of a specific amount of company shares at a specific time in the future/when certain events occur (eg. exit). Read more here.

Incentive Stock Options (ISOs)
Tax-optimised options which, when exercised, are taxed at a capital gains rate rather than an ordinary income rate.

Non-Qualified Stock Options (NSOs)
Options which, when exercised, require their holders to pay ordinary income tax on the difference between the grant price and the exercise price of their shares.

Restricted Stock Units (RSUs)
Common stock is issued to the holder, at no cost to that person, at a certain point in the future. There is no exercise process, as the shares are issued automatically upon vesting. If a company does well over time, options can turn into a huge advantage for their holders, because they maintain the right to exercise these options for a fixed, lower price while the actual share price keeps increasing.

The share price minus the strike price represents what employees gain upon exercising their options.
The share price minus the strike price represents what employees gain upon exercising their options

 

3. Basic Equity Terms

Equity can take many forms. The most common ones are:

Share Capital
The part of the capital of a company that comes from the issue of shares.

Employee Stock Option Plan (ESOP)
A programme dictating the terms to which equity distribution must abide within a company.

Option Pool
The percentage of the company’s total outstanding shares reserved for employees.

Vesting
Options often do not allow their holders to buy or sell shares immediately. Holders’ options become exercisable (gradually or all at once) over a specified period of time, during which they are said to be vesting.

Vesting Schedule
An outline of how many options an employee is allowed to exercise at which points in time. At the end of the vesting schedule the employee should be able to exercise all of his/her granted options. Read More Here.

Cliff
The point in time after which the vesting period begins.

Strike/Exercise Price
The predetermined price at which employees can purchase the shares corresponding to their options.

Exercise Window
A fixed period after an employee’s departure from the company during which he retains the right to exercise his remaining vested options.

Liquidity Event
An event triggering the conversion of stakeholders’ options or shares into cash (eg. an acquisition).

Dilution
When the value of holders’ options/shares decreases as a result of new shares being issued.

Fully Diluted Equity (FDE)
The total number of shares that would be held by each stakeholder if all of the company’s legal obligations towards its stakeholders (eg. repaying convertible notes) were fulfilled.

Share Price
The price of a company’s shares, determined by its current valuations divided by its total number of shares.

 

As you have probably noticed by now, there is quite a lot to keep track of - so why not download our complete employee equity guide for free to get the full overview. We've filled it with great explainer graphs and calculation examples to make it easily applicable. It's all you'll ever need to know about employee equity and how to set up employee share schemes. 

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Cap Table Management?

The common mistake in cap table management is that startups begin without a structured setup because it is very easy to manage in the beginning when the cap table only consists of founders with common shares and a couple of angels with convertible notes. But, as the company grows, hire the first employees, introduce share plans, get more investors and new share classes it gets increasingly difficult to maintain the overview of ownership. All these mistakes are easily avoided with the right tools. Avoid paying the price for bad advice and get Capdesk to help you keep track of ownership. Download the ultimate cap table guide to learn more and get started with Capdesk. 

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Find out how Capdesk can help your company avoid costly mistakes in your cap table, shareholder registers and employee share plans. Get in contact with one of our equity experts

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MathiasVillads
MathiasVillads

Growth Marketing Manager at Capdesk - Europe's best private equity platform.