The answer is easy – 10% to 20% of the company. The difficulty is understanding why and how to stick to that limit!
Is this a legal requirement?
The range of 10% to 20% is based on our extensive experience, of having advised over a thousand companies both on setting up employee share schemes.
Are there legal requirements on how much of a company you can give to your employees?
You may need to agree a limit with your investors, and 10% to 20% is a typical limit to agree with investors. If you list your shares on a stock exchange (so the public can freely trade your shares) the rules of that stock exchange may impose limits or guidelines on how much of the company’s shares you can give to employees.
Why stick to a 10% to 20% limit?
Company law states that holders of 25% of shares can block special resolutions. A special resolution is an agreement between shareholders which affects something fundamental to the structure of the company. You may need to get a special resolution as part of an arrangement to successfully raise finance, relocate the company in a different country or sell the company. If you give employees 25%, or even close to 25%, you are giving them a huge amount of power to affect the future of the company.
Although voting power might seem a good way to engage employees in the business, it’s not. The law relating to special resolutions is confusing without specialist legal advice, and the issues covered by special resolutions are obscure, legalistic and far removed from the business issues employees are likely to be familiar with or have an opinion on. If you want to engage employees in management of the business, it is better to consult with them on the sort of decisions made at board level or below, relating to every day business or strategy.
Should this amount be allocated straight away?
No. If you do, you’re likely to run out of shares too quickly.
You need these shares to last from before your seed funding round up to an exit. You need a strategy for awarding shares so that, whatever limit you decide, you can keep within your limit over the long term.
Does this include founders?
Founders tend to have a different and uniquely long term view for the company. They should be considered separately from other employees.