Behind every successful company stands a successful team, intensive cooperation and the common will to reach the goal. It is the team that turns the dream of a successful business into reality. But how can young companies with limited budgets attract the talents they need to succeed? And how can the motivation of the team be promoted? A look at the most successful start-ups of Silicon Valley shows the answer: They rely on profit-sharing programs.
What is a profit-sharing program?
A profit-sharing program offers the option to share the success of a company with the team (employees, freelancers, consultants, etc.). Implementation is based on a plan that defines what, when, under which terms and how much individual employees receive.
Profit-sharing programs offer many advantages:
Employees can be recruited by assuring them success participation.
Profit-sharing schemes are often vested over several years. This means, employees can only dispose of the full number of their success-shares after the expiration of these years and might lose some of them if they leave the company before the end of the vesting-period. Thus, these programs create strong incentives for employees to stay in the company.
Reward added value
Profit-sharing schemes can be designed to reward specific contributions from employees who increase company valuation. For example, when acquiring a new customer, a certain percentage of the order volume could be spent on the employee. This creates incentives for employees to actively participate in the value creation of the company.
Promote long-term thinking
Profit participation usually pays off only in case of a liquidation event such as an exit. Thus, employees are being motivated to focus on long-term success.
Especially start-ups can benefit from the participation of their team in the common success:
Recruitment of early employees
Young companies and start-ups have an effective mechanism to attract employees even if they cannot afford competitive salaries.
Many start-ups aim for an exit. Since employees can only redeem their success shares in the event of a sale or an IPO, they have a particular interest in achieving the exit on the best possible terms.
Which profit-sharing programs are there exactly?
There are various ways to involve employees in the success of the company. Above all, have established themselves:
- Real corporate shares
- Stock options
- Virtual Shares / Phantom Shares
Real corporate shares
One variation is to let employees become a shareholder of the company. In this case employees receive an equity investment, which will be deposited in the commercial register and thus become shareholders of the company. The exact implementation of these programmes can be arranged differently. For example, co-determination rights can be reduced or it can be determined how much profit sharing an employee receives. Irrespective of this, this variation of success participation involves quite a lot of effort. A lawyer must be commissioned for the formation of the participation contract and all shareholders must agree in a joint notary appointment. In addition, founders should be aware that they are giving away real shares of their company.
Share Options (ESOP)
Another possibility are stock options. An option is the right, but not the obligation, to buy the stock of a company at a specified price during a certain period, usually the IPO or exit. Such programs are also referred to as the ESOP (Employee Stock Option Plan). In the case of an ESOP with its options, the employee thus has the opportunity to buy the shares in the event of an IPO or an exit at a certain, generally discounted price. The greater the difference between the fixed purchase price and the actual market value of the shares, the greater the advantage for the employee.
In the case of virtual shares employees do not receive real corporate shares or stocks. Instead, they are rewarded with so-called virtual shares, also called phantom shares. The value of a virtual share equals the value of a real share of the business. Virtual shares grant the right to receive this value in the event of an exit or other liquidity event. Thus, an employee receives a financial stake in the company’s success without any other rights of genuine corporate participation, such as co-determination rights.
Disadvantages of traditional profit-sharing programs
Studies indicate that success sharing programs can have a positive impact on sales and earnings, employee recruitment and retention, employee identification with the company, and the company’s reputation. Yet numerous surveys, such as the latest study by the Hans Böckler Foundation from 2018, point out that traditional success sharing programs are often bound up with problems.
For instance, there is a great deal of bureaucracy involved in the aforesaid programs. Contracts must be drawn up and, depending on the type of participation chosen, lawyers and notaries must be commissioned and paid. Real company shares go hand in hand with long-term commitment and decision-making can become more laborious. Furthermore, not all legal forms of a company are compatible with all variants. For example, stock options can only be issued from a stock corporation. For employees, the programs are also mostly highly non-transparent. They usually have no opportunity to compare the offers of different companies in the market and do not know what participation their colleagues receive. Last but not least, the creation is a good deal of work. Many parameters must be considered and implemented so that the program fits the company and its goals.
Tokenized VSOP – blockchain based profit-sharing
By using blockchain technology and tokenization, UnitedCrowd now offers a new way for companies to share success with their employees: Tokenized Virtual Shares. Tokenized Virtual Shares are digital units that represent standardized contracts on the blockchain. These contracts can grant the financial value of company shares, without the other rights of a real shareholder. This value is monetized upon the occurrence of a specified event, such as an exit. Thus, the owner of Virtual Shares receives a payment in case of such event. Tokenized Virtual Shares are based on a standardized contract, specifying the terms of the programs. Self-executing Smart Contracts to whom the contract is linked automatically execute the transfer as soon as the terms are satisfied.
Tokenized Virtual Shares offer numerous advantages:
No notaries, no paper
No notaries are required for a VSOP. In fact, neither the employee nor the employer has to sign a paper contract.
Smart Contracts, on which the Virtual Shares are based, are self-enforcing contracts. This means they automatically enforce compliance between the company and the team when certain conditions have been met.
VSOPs provide complete transparency to all stakeholders. The implementation is thus comprehensible for all parties.
Tokenized Virtual Shares can be easily transferred on the blockchain.
Implementation by UnitedCrowd
With UnitedCrowd implementing effective profit-sharing programs with Tokenized Virtual Shares is easy to do. For this we provide everything on our platform that companies need – unbureaucratic, clear and customizable.
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