How to attract top talent to your start-up
Is the sweetener of share options still relevant to start-ups today? What other incentives can start-ups offer to attract the best employees? Ashleigh Macfarlane, of recruitment firm BlueGlue, gives us the lowdown
Times have certainly changed since the dotcom boom – capital is harder to come by, there are fewer stock market flotations (IPOs) and the timeframe from start-up to exit is much longer now.
But competition among start-ups to attract and retain the best people is as fierce as ever, and we are seeing businesses use all sorts of incentives to tempt the best candidates towards them.
Start-ups need to continually ask themselves: “What will really motivate someone to join my business over a competitor?”
Candidates we speak to are motivated by different financial rewards, often depending on their seniority. Those entering a company in a senior role are generally more interested in equity, while a more junior hire typically finds cash bonuses more appealing.
However, all start-ups we work with still use stock-based compensation on some level – for two reasons:
1. To incentivise their executives and employees. I still think this provides a great opportunity for staff to share in the growth of the company and, if structured properly, it can align their interests with those of the company's shareholders and investors, without burning the company's cash on hand. Some more established start-ups have set up a bonus scheme, alongside the option of shares, which is obviously the best of both worlds.
2. As a very useful negotiating tool to secure that person they really want to work with them.
Many start-ups offer Enterprise Management Incentive (EMI) share options. Specifically designed to help small, higher risk companies attract and reward staff, it's pretty simple to understand. Music to the ears of a candidate!
Enterprise Management Incentive (EMI) share options are UK specific, and need to be approved by HMRC prior to issuing options. The prices at which options are granted also need to be approved by HMRC.
Once this is done, the employee is not taxed on the notional benefit of those options and only becomes liable to tax if those options are exercised. When the shares are sold, the employee becomes liable to capital gains tax, but this currently has a £10,600 exemption threshold and a maximum rate of 28%, well below the maximum income tax rates. What's more, costs of setting up an EMI scheme are not high: one of our clients recently set up a very standard scheme for £1,500 of legal fees.
I have also seen some companies recently offer differed or delayed compensation to employees. There are different ways to do this but the best is either offering an increased salary when the employee hits performance milestones or at the end of a probationary period.
In addition to share option schemes, some interesting incentives are being successfully used by our clients to further tease candidates towards them. Many involve promoting a team environment. A true team, comprised of individuals who are each critically important to each other and to the overall success of the company, and who know their importance and take pride in themselves and each other, is a powerful incentive.
Telrock does this by offering staff weekend trips away, and at 4.30pm every Friday you'll find OVO Energy staff at a drinks and food evening, such as a BBQ. hostelbookers.com does things a little differently and offers its employees massages. It's these subtle benefits, while not directly monetary, that can have a big impact on the depth of commitment expressed by employees.
There is no denying that the opportunity for a financial windfall is a powerful employee incentive. Even with the changing business environment, stock options, direct equity ownership, profit sharing plans, and/or bonus employee incentives should be part of the incentive package provided to your team, but don't underestimate the more subtle ideas that we know are working for some of our clients.
Ashleigh Macfarlane is marketing manager at BlueGlue , a specialised recruitment department for growing start-up and SME Tech and Digital Businesses. The company has extensive experience of working with 60+ high growth companies, including LOVEFiLM, Moonfruit and Funding Circle. Follow BlueGlue on Twitter @blueglueltd