After the Richer Sounds founder handed over control of the business to his staff we asked experts whether employee ownership is a good idea for startups
Employee ownership is becoming more popular. For instance, business leaders who are planning retirement are arranging for employees to take ownership of their firm and those launching startups have seen the growth advantages it can bring.
The latest one to do so is Julian Richer, founder of the UK audio and entertainment chain Richer Sounds, who announced that he’s transferring 60% stake of the business to his 522 employees. Each of them will be sharing a total of £3.5m where they’ll receive £1,000 for every year they’ve been at the company. “Having hit the ripe old age of 60 in March, I felt the time was right, rather than leaving it until I'm not around, to ensure that the transition goes smoothly and I can be part of it,” Richer told the BBC. The shares will be placed in an employee ownership trust.
And Richer isn’t alone. Encouraged by the government’s support and the many schemes such as Share Incentive Plans, Enterprise Management Incentives and Save As You Earn available, which made it easier and more attractive to hand on businesses to employee trusts, more companies are doing so.
In May 2019, communication services company BT too handed its staff £500 annually in company shares which will total to £50m to its entire workforce. Other examples are companies like Blackwell bookshops, jam maker Wilkin and Sons and polymers manufacturer Scott Bader among others.
But this is nothing new. Indeed, the John Lewis partnership wherein all its employees – or, as they’re called, partners – are co-owners of the company was launched in 1920 and since then all the workers irrespective of their position get their share from the profits.
Given how employees owning a stake in a company can create a positive culture, increase productivity and improve decision-making, according to a report by the Employee Ownership Association, it’s easy to see why the employee owned sector is growing by 10% every year. Furthermore, employee owned companies are contributing circa £30bn to the UK economy in annual turnover.
One of the main incentive to give a majority of control to your staff through a trust is the exemption of the capital gains tax as well as an income tax exemption of £3,600 per tax year when paying employees bonuses.
The question is should entrepreneurs emulate Richer’s endeavour towards employee ownership? “Honestly, it all depends on how prepared they are to let go of their baby,” says Nick Liddell, director of consulting at The Clearing, the consultancy firm and co-author of Wild Thinking. “Entrepreneurs come to rely on their companies every bit as much as their companies come to rely on them. Julian Richer has decided to hand over a substantial part of his company to its workers because he wants the spirit of his business to live on – but this will only work because he has spent the past 30 years instilling this spirit in his colleagues.”
Indeed, it’s imperative to ensure your employees share the same ambition and passion for the company. “While it's true that employee ownership creates strong incentives in the form of employee motivation and productivity, this counts for very little if the people who work in the company aren't steeped in a strong, sustainable culture,” Liddell says. “That's why people like Julian Richer and Stephen Twining are really valuable examples to follow – not because they demonstrate the advantages or disadvantages of any particular form of ownership, but because they show that passion for a business can be sustained through any number of ownership models, provided employees share a common set of values and a strong sense of purpose.”
Some believe employee ownership might be the difference between your startup becoming a success story and failure. “Once startups and new businesses are through the very early stages of survival, two issues tend to keep entrepreneurs awake at night,” argues Simon Rogerson, CEO and co-founder of Octopus Group, the investment company. “First, they obsess about losing the company culture as their business grows. Second, they worry about missing out on the talented and highly-skilled people they need to keep driving their business forward.” He opines employee share ownership addresses both those issues.
Furthermore, it also helps entrepreneurs who’ve just began their business journey. “While you [may] not have a great deal in terms of cash to give away to employees at the early stages of a company, you tend to have plenty of equity,” says Anthony Rose, CEO and co-founder of legal tech company SeedLegals while speaking with Elite Business. “An equity share scheme is a fantastic renumeration option for entrepreneurs looking to incentivise their team to achieve high performance as it helps to align the employees’ interests with that of the company and encourages greater participation in the value or outcome of the company.”
One such startup which capitalised on the Enterprise Management Initiative scheme was travel loyalty platform, Upgrade Pack and leveraged the tax efficient way to reward its employees. Co-Founder and chief operating officer Urchana Moudgil says she was inspired by the John Lewis partnership and that “giving our employees equity was a must.” She claims Upgrade Pack was one of the first few tech companies in the UK to do so and the benefits are immense. “Awarding share options upfront has created focus, transparency and motivation and a tangible sense of the value we’re building, as well as a thank you to our staff, like Julian Richer has done,” she adds. “In setting up an employee trust Julian Richer is creating a legacy, while protecting the future interests of his employees and thanking them for their contribution over many years. Similarly, we are rewarding our staff, albeit from the get-go, while encouraging a commitment to our longer-term goals.”
Moudgil is hardly just the only one to do so . In a report by SeedLegals, which took information from 200 funding rounds in 2017, 47% of companies offered equity options for its staff. “For a young startup it can increase focus and at vital milestones in the growth of a business,” she continues.
While it has many advantages, it’s essential to get it right. For starters, employers must educate their team about the whole scheme and the consequences should the employee leave. “It’s also important for founders to explain to employees how their share options will vest – that is, at which point they will get to keep the shares if they leave the company,” Rose states. “Vesting means that shares are not only an incentive for the best talent but also a retention strategy too, which is crucial for any company that wants to scale towards the next level of valuation. Unicorns tend to be built on the hard work of founders and employees who share aligned goals. For founders who aspire to create the next unicorn, it’s wise to consider how best they might start sharing the future spoils from the outset.”
Additionally, business leaders must invest time in choosing the right scheme for their company. “It’s important to make sure share schemes have a tangible value and are not just seen as akin to buying a lottery ticket,” Rogerson advises. “I think a well-structured share ownership programme is one that gives employees the ability to monetise their shares when they choose to, without feeling locked in for an interminable timeframe. This is harder for an unlisted company than for a listed business but it’s certainly not impossible, as we have proven.”
Even baby boomers such as Richer have realised the benefits of making your team more than just your employees. It’s indeed a unique chance to ensure that capitalism becomes more inclusive. And emulating John Lewis and Richer might be a good idea for your business. “If you’re thinking long-term and building a business for the future, it still offers huge opportunity and value,” Rogerson concludes. “In a very practical sense, it might actually be easier, as you’re likely to have an established finance team who can make it happen.”