A Startup is an innovative business model that seeks to offer innovative solutions by making the most of technology, but to achieve this it needs to make use of capital.
What is really complicated is to capture the interest of investors regarding an emerging business, which, although it must have a scalable business model, the achievements are not always obtained in the short term.
In this context, incorporating employees as partners in a company can be an effective strategy to motivate and retain key talent.
The good news is that there are several alternatives to achieve this without necessarily granting direct share ownership. For example, Phantom Shares, Employee Stock Ownership Plans (ESOPs) and other options.
Alternatives for incorporating working partners
There are a number of reasons for wanting to bring employee partners on board, mainly because they are so immersed in your business model, they may be more receptive to placing their trust in it.
Your employees understand the corporate vision of the start-up and have a real motivation to see it grow. Here are some alternatives for incorporating worker-partners in a formal way.
Generally defined as imaginary participation rights, also known as fictitious shares.
It involves an agreement between the company and employees whereby employees receive an indirect share in the form of a bonus once the company’s success is established.
Although valued by some as an investment in shares, as agreements that set out contractual benefits, it really acts more as a corporate incentive based on performance.
This means that in the legal context the employee does not appear as a shareholder, but does have a real right to receive cash compensation according to the conditions set out above.
A rather interesting aspect of the functioning of one of the most popular alternatives for incorporating worker-members is that the quantification is based on the performance of the actual shares.
What is the objective of Phantoms Shares?
Employees are a critical part of any business’s ability to achieve sustainable success.
According to experts, the purpose of Phantom Shares is to promote corporate wealth maximisation, where both employees and management are oriented in a merger to promote long-term wealth.
From the employees’ perspective, this way of investing, so to speak, helps to reward the time and all the valuable contributions made by employees in order to grow the company.
Advantages of Phantoms Shares for emerging companies
Perhaps you are wondering if it is worth implementing this type of alternative to incorporate working partners, with the intention of helping you to clear your main doubts about it, here are the main advantages.
Flexible remuneration system
The fact that it represents both a pay and a flexible system helps both employees and corporate leaders to set the terms of this negotiation.
It is mainly the managers who suggest this implementation and they must manage to offer incentives that really capture the interest of the workers.
However, when the right selection of employees has been made and a favourable working environment exists, it is much easier for this type of strategy to work and provide benefits for both parties.
Impact on entrepreneurial motivation
In the management of start-ups, teamwork is extremely important, as these are very ambitious projects that are almost always short of resources.
When analysing most of the success stories of start-ups in Spain, it is easy to see a common denominator: motivation.
And although this motivation emerges mainly from the person who had the idea of developing the startup, as a leader you must manage to infect the people who are also involved in the project with this enthusiasm.
Providing economic benefits based on the achievement of the startup’s growth objectives is an excellent idea to increase the motivation of both parties.
It is an affordable alternative
The requirements or management necessary to set up this type of alternative for incorporating worker-members remain very accessible. It is presented as a viable alternative for both public limited companies and private limited companies.
No change in capital structure
Another benefit of implementing a phantom share-based system is that it does not alter the capital structure, nor does it have the ability to influence it.
Even at the bureaucratic level this does not require such a lengthy process or multiple requirements, but you should take advice on how to formally enter into the contractual arrangements described above.
It is contained in the IRPF
The economic gains achieved by the company in question will be reflected in the IRPF (personal income tax) and expressed as employment income.
This means that if the start-up company receives high returns it will also be getting good benefits, all this in a win-win system with benefits for the workers and for the corporate leaders.
Phantoms Shares Considerations
While it is true that this figure as one of the maximum alternatives to incorporate working partners it would be very irresponsible to present it as an option free of considerations.
These are some possible disadvantages of implementing phantom shares in a company:
- The first point is quite obvious, these are not real shares. Although the beneficiaries do receive real capital subject to the performance of the shares, they do not appear as a shareholder in a formal way so they do not have any decision-making power in the management of the company.
- If the company’s performance is poor and it is perceived to be underperforming, the phantom shareholdings will also be low, so some of the benefits described above may not be present.
How are the benefits of Phantom shares calculated?
It is easy to think that phantom shares are only based on a subjective aspect, as they are not legally real shares.
You should know that the value of these shares is agreed in a negotiation between the employee and the entrepreneurial leader, in most cases the economic value is subject to the real value of the company’s shares.
Employee Stock Ownership Plans (ESOP)
ESOPs are programmes in which employees acquire shares in the company, often as part of a benefit or retirement plan. This gives employees a sense of ownership and participation in the company’s success.
They can also be particularly effective in improving employee engagement and loyalty, as well as providing tax benefits for both the company and the employees.
Advantages of Employee Stock Ownership Plans (ESOPs)
- The benefits apply to both the employer and the employees, and it is even an incentive that can work very well for talent attraction and retention.
- It is an efficient alternative in the context of funding or contributing to the participation of retiring employees.
- From an employee context, this type of incentive helps to develop a greater sense of belonging and loyalty to the company, which can impact on achievement motivation.
Employee Stock Ownership Plan (ESOP) Considerations
None of the alternatives for incorporating worker-members is perfect, all options have both positive points and certain weaknesses. And in this case the following are some considerations:
- If the company ever faces financial difficulties this may reflect a negative impact on the company’s shares.
- The management of this investment instrument is often somewhat complex, in many cases requiring the expertise of a qualified professional.
Borrowing to raise funds
In case the alternatives for incorporating working partners presented in this article have not caught your attention, obtaining loans is still a useful option.
- ENISA Programme: it is subject to the management of the Ministry of Industry and contains several financing programmes that seek to promote the development of SMEs through grants ranging from 25,000 to 1.5 million euros.
- Innovatia 8.3 Programme: if you are thinking of setting up a company in the scientific or technological field, this financing programme will help you. It is part of the European Social Fund in collaboration with the Women’s Institute.
- ICO Loans: Its purpose is to offer financial support for entrepreneurs who are thinking of expanding their businesses, acquiring new equipment or even for projects that are experiencing liquidity problems.Conclusiones sobre las alternativas descritas
You’ve probably noticed that there are multiple alternatives for incorporating working partners, it’s important to choose an option that is consistent with the nature of your business.
Whether you opt for Phantom Shares, Employee Stock Ownership Plans (ESOP) or other options, having advice for entrepreneurs in Barcelona can be key to making the right decision.
Regardless of which alternative you think will yield the most positive results, keep in mind that making these types of decisions is a win-win for both sides of your business.