Diary of a Sharemark float: share incentives

James Hunt is a solicitor, serial entrepreneur and founder of Everyman Legal – a new type of law firm providing legal services for entrepreneurs. The company of solicitors is the first in the UK to announce it will take advantage of the new practising regime created under the Legal Services Act by seeking a stock market admission. The company intends to trade its shares on Sharemark – a stock market for smaller companies – in the last quarter of 2012. In an honest and open account for Real Business, James Hunt will be charting the ups and downs of preparing his company for an admission.

An important element in preparing for our Sharemark flotation later this year is choosing a share incentives and options plan that best fits our firm’s culture and needs.

We are a small company, but with ambitious plans, so we need to be able to motivate and reward individuals whose contributions will be fundamental to our success. Without the cash resources to pay top remuneration, share incentives are crucially important.

I have been advising owner-managers on this subject for more than 25 years so I know the technical aspects: the different types of scheme and the tax and legal issues for each. However, I realised some years ago that the most challenging (and interesting) part of this work is how to determine who should benefit and by how much. But doing it for your own company is even more complicated.

To me, it is important to have a wide spread of ownership within the team. By doing this I believe we will create the right culture and team spirit. It is also important to reward key individuals.

There is a danger that share awards become associated with the “pecking order” and that individuals measure people’s worth in terms of percentages of the issued share capital. For very senior team members, I therefore tried to look objectively at the contribution they could make. I balanced this by including certain rewards that would be earned over five years linked to performance targets set each year.

I also looked at projected share values in five to ten years’ time so that we could all see what the incentive could be worth in cash terms in the future.

For wider share ownership, I fixed a one-year service threshold and then awarded a fixed value of shares. For part-time team members, the fixed award was scaled back according to the number of days worked per week.

Here are the top five mistakes I have seen private companies make with share incentives:

1. Not having and exit strategy which means the share incentives have no perceived value: this is potentially the great attraction of Sharemark.
2. Setting an unrealistically high value for the shares at time of the award: this can lead astute team members to question the commercial integrity of the scheme.
3. Awarding significant shares or options to employees who have yet to prove themselves and then not being able to claw back those shares if they fail to perform.
4. Upsetting existing team members by favouring new arrivals with more generous offers.
5. Making promises of equity to the team when values are low and then creating tax problems for the employee when putting in place legal agreements when the value has risen.

As I consult with colleagues on how to structure our own scheme, I hope we will learn from these mistakes. One advantage of tackling this now – well before our admission to Sharemark – is that we should be able to implement effective share incentives before we have valuation problems.

Read the full diary series here.

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