Ups and downs of employee ownership

Last updated 07:38 22/07/2013

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Q: A staff member wants equity in the business. Is it a good idea to do that?

A: There are practical and philosophical considerations to take into account when sharing the ownership of a company with staff.

Understanding why this staff member is looking for equity is a good place to start. Are they looking to actively be a part of the ownership of the company? Is there some type of benefit they will get from the ownership stake?

Understanding whether you are strategically aligned with giving staff equity is another factor. Are you making this decision to engage staff further in the running of the company? Are you willing to give up some control to allow staff to feel like they are contributing to the growth of the company? Is this something you want to set up for all staff?

The short story is there has to be value in it for both parties. You may want to see greater engagement of your workforce, and to reward them with something they have the opportunity to improve the value of. Equally staff members will want to see where the real value is for them, which might be part of the profit share of the company, or a slice of a potential sale of the company.

Most importantly understanding obligations and motivations should be central to this decision. Receiving shares in a company for effort will create taxable income. This means there is a cash cost for one of the parties, neither of whom is receiving cash for the transaction. An ownership stake may have liabilities along with it for staff members. Equity holders may actually be less engaged with the company if they cannot influence the prosperity of the business, or have such a meaningless stake it is effectively worthless.

Naturally you would get comprehensive professional advice.

Nick Churchouse is venture manager at Creative HQ: www.creativhq.co.nz

A: Employee ownership of a company can be a powerful and useful tool, creating what some call "golden handcuffs" - creating a tighter bond for high value staff to stay with the company longer.

Employees and shareholders are different beasts though. Many people have idealistic visions of what being a shareholder is all about. Unlike taking shares in a publicly listed company, potential shareholding staff need to understand that it is for the long-term and there are down sides as well as upsides.

Ask them if times got tough, would they take a mortgage against their house to help provide short-term finance to the company?

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If you decide to progress get an experienced lawyer to write up the revised shareholders' agreement and make sure you do not limit your own exit options.

Mark Robotham is a small business expert: www.growthmanagement.co.nz

To ask a question email rebecca.stevenson@fairfaxmedia.co.nz

- The Dominion Post

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