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Why Aren't Your Employees Owners?

I just read an article about an entrepreneur I knew, who just sold her company after about 10 years. She made a bunch of money and thanked the friends and family investors who helped originally stake her and who also got a nice return. Then she addressed her employees and thanked them (none were shareholders) and said, essentially, "now on to a new adventure. "I happened to know that of the two dozen employees that were there, more than half had been there for more than five years, several for nearly ten. How much do you think they contributed to her success? And for that they got themselves a nice pat on the head!

For me, there's something inherently wrong about that. Good and loyal employees are what underpin success. Yet many entrepreneurs miss that and in so doing, may miss having an even better company and an even bigger future pay day!

Once you go beyond the early days of just trying to making your small business a reality, you, actually, lay the foundation for your company's culture and its future, by bringing on new employees. Making your employees owners through different types of stock ownership or profit sharing, may be the smartest thing you ever do. It gives employees a different and more positive perspective about their job and, potentially, provides a significant advantage for creating and optimizing value and hedging against business failure.

Additionally, though, there are other benefits, especially in the early going. With employee ownership as part of the overall compensation package, this should enable you to keep early salaries at or below market, helping better manage early cash flow. Should cash flow get tight, as it invariably will, employee-owners will be far more willing to ease the burden by either temporarily deferring or even taking a temporary cut, to help the company.But more important, to you, as the entrepreneur/owner, you have "partners" who are in the game with you. They will help grow your company, protect against your downside and, if and when, that big payday does come, win right alongside of you!

Here are some guidelines to help you structure an employee ownership program in your small business:

Whatever kind of plan you use, make sure ALL employees understand it.
The most straightforward plan is a stock option plan, where the company issues options for employees to purchase stock at a certain price at some future date. Whether you set up a stock option plan, a "phantom stock" plan or a profit sharing plan (all of these can be explained to you by your tax and legal folks) be sure you understand the terms and can explain it (or have someone explain it) to employees so they understand it. It does no good to have a great benefit that nobody thinks is important because they don't get it.

Set aside a specific percentage ownership.
A good rule of thumb (used by many companies) for employee ownership is a maximum of 15%, whether that be of outstanding stock or overall profits shared. But that is only a rule of thumb. And decide if you want employees to be able to invest directly. Use your advisors to help you.

Create vesting over time.
Vesting means the period over which the employee actually gains ownership of the stock options. With stock option grants, typical vesting is over a four or five year period. This provides incentive for people to stay. The longer they stay, the more they own.

Use ownership as incentive.
Granting stock options as part of incentive compensation for company bonus or as part of sales plans, is another good way to create ownership without spending cash.

"You have to be present to win!"
In most stock option or profit sharing plans, you have to be an employee of the company to either exercise the option or take part in the profit sharing. Typically, with options, the employee has a period of time after they leave, usually 90 days to exercise their options or the options are lost. With profit sharing, typically, they get a pro rata share of the profits for the percentage of the profit sharing period they were employed. This also keep stock ownership a closed community of employees only.

Get good tax and legal advice.
This goes without saying. This post is not meant to be a tax or legal guide, but a general business one. Get good professional counsel before you set anything up.

Making employees owners may be the single best decision you ever make. It helps create more loyal employees who have a stake in the future of the company that may help drive up value and provide fortification against failure.

"The Entrepreneur's Yoda" knows these things. He's been there. May success be with you!

Do you believe in employee ownership? Include your opinion in your comments. It will help other entrepreneurs!

If you like this post, by all means, share it with your networks and colleagues.



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