1.3 How long do you want to offer shares for?
We’ve established that it is important to have a long term employee ownership goal as well as having a rough idea of the amount of equity you might consider giving to your employees when first launching your ESS. But how long should you offer equity for? Should you offer shares every year? Or should it be a one off occasion?
Answering these questions begins by looking back on what you wrote down for the Workshop Task in Unit 1.1. Deciding on how and when you are going to allocate equity is a lot easier (and makes a lot more sense) if you have already worked out the reason why you want to offer equity and who you want to offer it too.
It is usually most common for organisations to offer equity year on year (annual allocation) or only offer equity as a one off event (single allocation).
> Annual Allocation: Involves offering shares/options/rights etc. every year.
Usually it makes sense to have a single window of time once a year where employees can opt to participate in your ESS. This cuts down on administration costs and generally makes it easier to manage your ESS for tax purposes.
It is important to think about your long term goal and issues arising from the dilution of shares (as discussed in Unit 1.2) when working out how you might offer equity year on year.
When reflecting on the issue of dilution it is helpful to note that after a period of time employees may begin selling their shares back to the business (usually through a trust…but we’ll get to that later), freeing up shares for redistribution to employees through your ESS.
Some examples of situations that might be suited to annual allocations include organisations looking for a means to increase employee engagement, small businesses that are expanding and looking to attract staff and medium to large businesses wanting to retain staff for longer.
An annual allocation also makes a lot of sense if you have a long term equity goal that is 10% or over, as you’ll want to allocate this equity over a longer period of time.
> Single Allocation: Involves a once off allocation of shares to your employees.
A single allocation of shares might be best suited to a retiring owner operator who wishes to give ownership of her small business to her employees or the founder of a start-up owner wanting to provide an incentive or reward to his start-up team as a supplement to their wages.
Key Point
Look back to the first reasons why you wanted to offer an ESS when deciding on how long to offer shares for.
Workshop Task 1.3
Reflect on the answers you gave in the workshop tasks 1.1. & 1.2. and then answer the following questions:
1. Which option aligns better with the reasons you want to offer an ESS?
a) Annual Allocation
b) Single Allocation
c) Something In-between (make note of your variation)
2. List the top three reasons why you chose the answer from the previous question.
