If there is hope, it lies with start-ups. As core British industries shrink or stall in the face of stagnation, Britain’s entrepreneurs offer a glimmer of light in a gloomy economic landscape. Data from Companies House and processed by Start-up Britain shows that 312,716 new businesses have been set up so far this year; creating jobs, racking up profits and generating the elusive grail of economic growth.
This trend is matched by an unprecedented interest in entrepreneurship right across the country. Aston University’s “Global Entrepreneurship Monitor”, recently found that over 20% of the working age population in the UK either expected to start a business in the next three years, were actively trying to start a business, or were running their own business – the highest level since records began in 1999.
However, the Government has faced criticism in recent months for its “tentative” approach to supporting the growth of startup businesses, with the Forum of Private Businesses (FBP) recently arguing that “bolder policies are needed” to replace what it sees as “timid steps towards helping firms create jobs”.
Whether the Government could do more to boost British start-ups is up for debate. However, one Government initiative announced in recent months will provide no end of help to the country’s entrepreneurs. It may not be specifically targeted at new businesses, but its ethos chimes with the experience of successful start-ups across the country. I’m referring to the Cabinet Office’s commitment to create and stimulate a “John Lewis economy”.
Nick Clegg has called this policy “one of the Government’s top two priorities for growth”, citing a report from Cass Business School showing that companies where employees have an owning stake have higher rates of staff satisfaction, lower rates of absence, and higher rates of staff loyalty. Unlocking these benefits will be fundamental to the growth of Britain’s startups.
This is because successful start-ups often grow quickly, expending blood, sweat and tears over an intense but comparatively short period. One such firm, with which RM2 is working, turns over around £1 million and plans to sell in less than three years for £40 million. Growing a start-up is often not a marathon but a sprint. This sprint can only be completed when key staff stay on side.
This is important in the early days – imagine that in 1979 Steve Jobs got fed up and told Steve Wozniak they couldn’t use his garage any more - but it is also crucial for the next wave of lieutenants that speed a firm’s development. Yahoo’s new CEO Marissa Mayer was the 20th employee at Google, and was instrumental in developing its search, email, and mapping products. What if Yahoo had tempted her ten years ago?
Successful start-up firms keep staff motivated, keep them on the payroll, and make rewards available when their work comes to fruition. Employee share ownership is an extremely effective way of doing this. If an employee has an owning stake in a company which is working toward a sale, they are more likely to stay and be motivated to exceed the business’ objectives.
The Enterprise Management Incentive (EMI), which was roundly endorsed and enhanced by the Government in the March 2012 Budget, is an example of such a scheme. Entrepreneurs can reward key staff with share options that can be made exercisable contingent on future performance, or more immediately and in recognition of efforts to date. The arrangement can be designed to ensure that employees pay only Capital Gains Tax (CGT) on the profit arising from the future sale of the shares (at 28%, or potentially at just 10% in cases where Entrepreneurs’ Relief is available).
What’s more, EMI schemes can be tailored to suit the goals and expectations of the entrepreneur – and ensure that only success is rewarded. Employers can set targets relating to where they want the company to be overall in terms of turnover or profit, or according to individual objectives perhaps based on key performance indicators (KPIs). The scheme can also be structured so that members of staff that resign or are dismissed lose their option rights and where they have already exercised options and obtained shares they can be compelled to sell their shares upon leaving the company; either at the price they paid to acquire the shares originally or at fair market value (whichever is lower at the time).
Entrepreneurs that are considering introducing an employee share scheme occasionally express concern about shareholder dilution – giving away either too much of their business, or too little to make a difference. However, with careful judgment, a perfect balance can be struck. Business owners looking for detailed advice can approach a consultancy like RM2, which advises businesses on the design, implementation, communication and administration of such schemes, and can help model the ideal size and nature of a company’s employee stake. Such support can help directors or shareholders ensure that they are not offering too little equity for an employee to be incentivised (hence wasting equity), or offering too much and being wasteful.
One-off bonuses, a more traditional incentive, fail to align the incentives of a business and its staff. Cash rewards incur significant tax and national insurance charges and can seriously dent cash-flow, leaving both sides out of pocket. Preserving cash whilst aligning rewards to performance and any seed funding investor requirements makes share schemes a valuable tool for early-stage, talent dependent ventures.
Start-ups are quickly recognising the benefits of employee share schemes. RM2 has seen a surge in interest among such firms and has guided a large number through this process. Examples include zeebox, which launched in the UK last year and has attracted major backing from BskyB, and Rebound Technology which has grown by 69 per cent to feature for the third year running in The Sunday Times Profit Track 100. These companies have kept key people on board in a way that reduces the business’ cash-burn rate; these people have then shared in the benefits of their collective success.
By following through on its commitment to support firms in offering employees an owning stake, the Government can give a significant boost to the entrepreneurial sector. Start-ups are prime candidates for employee share ownership. If the drive to build a “John Lewis economy” supports such businesses in doing so, it will make a real difference to one of the most vibrant parts of the UK economy.