Employee participation in startups and scaleups: conditions for success

Employee participation as a reward tool also fits growing companies

Let us zoom out and take the broader, integrated reward policy that an organisation often already has in place as the starting point. Even startups and scale-ups began in their early days by linking starting salaries to specific roles. Many added commuting allowances, a career budget, and some introduced a pension scheme.

In many cases there has not really been deliberate thought about a reward policy and companies look sideways at what the neighbouring startup or peer business is doing. The focus is naturally on other matters, employees are generally enthusiastic, and a real (strategic) HR policy is often missing at smaller companies.

Strategy

Reward as a motivator

But to what extent is that actually a problem? Reward is often seen as a strategic instrument to steer employees in the right direction. An organisation has a mission and a strategy that describes how that mission can be achieved. Part of that strategy is the employees who execute it. Larger companies usually have an integrated HR strategy with multiple HR instruments to support the organisation in reaching its goals. Reward is one of those instruments to motivate employees, increase engagement, and ultimately improve performance.

Reward as a distribution method

Growing companies generally have fewer resources but, fortunately, much more flexibility and room to set their own course. At its core, reward is not a means to motivate, to boost job satisfaction and happiness, to attract and retain talent, let alone to lift performance. Reward is rather a distribution method (a basic condition), and the challenge lies in tapping into intrinsic motivation as the means to motivate employees, retain them and contribute to their job satisfaction.

Insight

Three key drivers of job satisfaction

American author Daniel Pink (Drive, 2011) captured this earlier in a striking way by naming the three key drivers of job satisfaction and fulfilment: Autonomy, Mastery and Purpose. In other words, give employees the space and freedom to develop themselves and do their work, and pay particular attention to their development. Encourage them and facilitate the opportunities for growth. Purpose, the reason why we as a company exist, is becoming increasingly important for many (younger) employees. Meaning, social contribution and sustainability goals are often leading in the choice of employer and company.

Especially at startups and scaleups we see much more room to chart an independent course and define an (HR) strategy that contributes to a "Great place to work". The companies of the future often have a mission and a larger purpose to also contribute to society. Products and services that matter; financial return, EBITDA and ROI are not leading here, although of course they remain important.

"Financial employee participation is not a trick or magic, nor a belief or law of nature."

Geert Jan Eissens

Why consider employee participation?

In general there are a number of obvious motives to use employee participation as a reward tool. The Dutch Social and Economic Council (SER) has for years encouraged employers to deploy employee participation as a reward tool. The main motives to consider employee participation also for growing companies are, in my view:

• Retaining talent (retention)
• Strengthening commitment and loyalty to the company
• Level playing field (employees share in the growth of the company)

For this reward instrument to work, you need to invest in it and apply it well. Proper implementation of an employee share plan translates into positive results at many companies. Financial employee participation is not a trick or magic, nor a belief or law of nature. The conviction that matters is that a business reaches success by combining the talent of all employees with insight from those employees into how the business runs. It is therefore not surprising that surrounding countries such as France, Germany, Scandinavia and the UK embraced this reward instrument many years ago, partly because the tax regime in those countries is very employee-friendly.

Investors

Fortunately, in the startup and scaleup landscape we see a forward-looking movement to embrace employee participation. That is not strange given that investors (private equity and capital investors) are key stakeholders and therefore "leverage" to help these growing companies move forward financially. Platforms such as Sharesquare also make sure that entrepreneurship and participation go hand in hand.

Approach

Conditions for successful implementation and lasting effect

The design and execution of any form of employee participation* consists roughly of four components: 1) strategy and policy, 2) technical design, 3) financials and 4) communication and HR. When developing and implementing a plan, but also when keeping an implemented plan in good shape, these four components need to be in balance with each other.

Strategy and policy: what kind of company do you want to be?

In the strategy and policy component the question is whether and how employee participation strengthens the strategy of the company. One company strategically wants to remain independent, another wants to preserve a family culture, the next wants to continue the adventurous spirit of a startup and become a scale-up, another wants to bind and motivate entrepreneurial professionals, yet another wants to be continuously the most innovative or wants to share ambitious growth targets with employees. Financial employee participation fits a company that wants to give employees an active role in realising the strategy and the strategic goals.

Technical design: what exactly is the question? How do I document things?

Technical design is the translation of the underlying question into a form and rules that help make this possible, that are understandable and transparent, and that motivate people to take part. An important point of attention in the technical component is the question of how the plan can develop in the coming years and where adjustments are possible. Every company can be sure that employees will leave, that new people will join and that internal trading will take place. Anticipate changes; this can save a lot of costs. Do not only look at costs related to redrafting and re-documenting legal agreements. Also check whether the plan is administratively sustainable. It is very important here that you, as an employer, lock in agreements and rules. An external partner who guides the implementation and runs the administration, such as Sharesquare, can support this very well.

Financials: what is my company worth? Am I rewarding or investing?

A listed company can see every minute what a share is worth, but a private company that wants to make shares or depositary receipts available to employees cannot. That requires a professional valuator who can determine the value of the company and, above all, how it will develop. Accountants can play an advisory role here. Another important external stakeholder in determining the value of the company and of the shares is the tax authority. Finally, it matters a great deal what the company is worth in the eyes of employees. How do they see the step of taking part? In their eyes, is it a (deferred) extra, a big gamble, a small or large investment? Are they running a risk, and how large is that risk? For the employer in a growing company that issues shares to employees, it is also important to be careful about the conditions under which the exit strategy is locked in.

Communication and HR: reward employees or also involve them?

When plans are introduced we see that, especially in the beginning, a lot of attention goes to technical design and financials, but in practice it is about how the employees experience the plan in daily life. That is where feeding the communication and HR component comes in. In the communication around financial employee participation the top of the organisation speaks positively about the plan, supports it and explains it. Information and communication are transparent and understandable, and help the employee make a good trade-off: what does participation mean for my personal financial situation and future, and for that of my company? The eventual choice for a form of employee participation must therefore also fit seamlessly with the company culture for employees, and vice versa.

* The best known forms are (depositary receipts of) shares via a STAK, share options, and virtual shares with value appreciation (SARs) or profit sharing (annual cash bonus).

Points of attention

A few considerations

In summary, an employee participation plan for a growing company (startup/scale-up) can work very well. Is it a guarantee for success? Of course not. It must fit the company and a well-considered HR strategy. A few additional considerations on why the proposed solutions might not be such a sensible choice after all, or at least naming the downsides that can arise. It is good and important that the principal is aware of these, both upfront when making choices and during the lifetime of both arrangements.

• Target group: board members or all employees? When selecting a group (for example MT/board), it is important for the employer to realise that this sends a signal to the rest of the organisation.
• Employee expectations: do employees expect to actually receive a say on the back of the new employee participation? A say in the form of voting rights and exercising influence is excluded if a choice is made for, for example, virtual shares or depositary receipts (STAK).
• Conditions: the conditions under which employees can in time exercise their claim rights in various forms of financial participation must be properly documented. Think, for example, of the termination arrangement for an employee who has to leave (good/bad leaver).
• The valuation question: it is important to be transparent and clear about this. Think, for example, of situations such as a sale of the company, transfer of the claim right and situations such as incapacity for work and the death of the employee. Usually an article on this is included in the shareholders' agreement.
• Risks: linking value gain to the value growth of the company (shares) also brings risks, namely stagnating share growth. Or is a share always the reflection of the growth of the company? For example, when valuation is done on the basis of EBITDA, this works fine.
• Implementation: make sure there is a clear and professional implementation plan. This starts with the decision-making by notably the shareholders and management, the costs of the arrangement, the communication of the arrangement, a set of rules or agreement for the new financial employee plan, and of course the valuation of the shares.

This article was originally published on HRmagazine.

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