Employee participation, or share based incentives, are a way for founders to include employees as co-owners of the company. The employees are given a portion of the company, either as share options, stock appreciation right or any other way.
As Sander Agterhof (Ernst & Young) says, "employee participation is all about attraction, retention and motivation". Transitioning from an employee to co-owner creates a culture of ownership that reflects back into the performance of the company.
Employee participation: from co-workers to co-founders
Sander Kooijman (Co-Founder Sharesquare and Attorney-at-law) lays out the foundation for employee participation. He explains how employee participation creates a culture of ownership, benefitting the employees as well as the company.
CEO & Co-Founder of Autheos
Christina Caljé is CEO & Co-founder of Autheos, a media technology platform applying machine learning and artificial intelligence techniques to improve the video strategy of brands and execute a personalized video experience for their online consumers. She has advised upon and implemented employee participation schemes in multiple companies across London and Amsterdam.
You’ve implemented and advised upon share-based incentives at multiple startups. What is your motivation for using equity as a compensation tool? When I was COO of Goldman Sachs’ talent practices across Europe and Africa, I learned the importance of aligning and incentivizing individual performance with business performance. In startups and scaleups where growth is such a priority, share-based incentives are a great way for the team to commercially benefit from the fruits of their labor. The whole team is working towards the same goal of value creation for the company!
Can you tell us more about the process behind implementing share-based incentives? In my experience, the decision making was different for each company, depending on the team size, product maturity and funding stage. Should you issue stock appreciation rights, stock options or direct share purchase? What are the tax implications of each, both for the employee and the employer? What should the vesting period be? All of these factors come into play within different contexts, which meant developing a bespoke approach for each company.
Three share incentives explained
Sander Kooijman from Sharesquare lays out the pro's and con's to each of the three most popular share based incentives: share options, stock appreciation rights and depository receipts.
Senior Manager of the People Advisory Service (Ernst & Young)
Sander Agterhof works as Senior Manager of the People Advisory Services department of EY Amsterdam. Sander is part of the Dutch EYnovation team and frequently assists startup and scaleup companies with the implementation of employee and management sharebased incentive plans.
Could you talk about the different types of share-based incentives? Share-based incentives or employee participation are umbrella terms that can include stock options, restricted stock units, share purchase plans, stock appreciation rights and so on. The types have specific characteristics but the initial distinction can be made in the way of settlement. You have share settled incentive plans or a cash-settled incentives. In the Netherlands a very popular way of settlement of share based incentives is done via depository receipts, a share without voting rights (“certificaten” normally via a “STAK”.) The three most preferred structures in the Netherlands are share purchase plans, stock options and stock appreciation rights. If funding or cash flow becomes tricky at an early stage, you can move to these alternatives to extend your runway. In the Netherlands, share purchase plans are popular due to the high potential benefit. On the other hand stock appreciation rights are also popular due to the fact that startups and scale-ups prefer to connect a cash out event for the employees with an actual external event when cash is available, such as an exit or investment round.
What role do investors play in employee participation? You often see that investors expect founders to offer a certain percentage of the company to some (key) employees to safeguard the company's success. The percentage varies across countries and business cultures. The average rate in the Netherlands is 5–10%, while in the United States, this is in the 15–20% range.