As a startup founder, I’m always on the lookout for the best talent in town (or in today’s world, ‘towns’ which are actually halfway across the world). While growing from the bottom up, it’s essential that we as business leaders present our vision in a way that excites prospective colleagues. By making our ambitions clear, we attract and create a team of people who are the right fit. That’s the first step. The second is ensuring we offer our colleagues the very best place to work – one that delivers the challenges, culture, and rewards they strive for.
In my years of founding and growing startups, I’ve learned a lot about the importance of demonstrating your appreciation for your team in ways that go beyond the paycheck. From a founder’s perspective, it’s mutually beneficial, as colleagues who feel valued naturally become invaluable colleagues.
Job mobility today is higher than ever, particularly with younger generations newer to the workforce. People aren’t choosing where they work based on salary alone. For startups, it can be tough competing with the big players for the top talent. Robust colleague compensation in the form of long-term schemes is a great way to attract, build, and retain your team. It’s a way of saying thanks to your colleagues for putting faith in your venture and offering them a share of the profits that you yield together in return.
There are lots of ways to go about this, especially in the startup-saturated Netherlands. Between stock options and profit sharing, employers and employees alike are often left bewildered. Moreover, explaining the overly-complicated technicalities of a compensation scheme to a prospective colleague can even become more of a deterrent than an incentive. That’s why it’s so important to demystify the complexities of compensation. After all, how can your colleagues trust that they’re being generously compensated if you as a business leader can’t paint the full picture of what you offer them?
In my opinion, there are a few key routes startup founders should consider taking when it comes to compensation.
Setting up a STAK (Stichting Administratiekantoor)
A STAK is a foundation you can establish to manage your shares. With a STAK, you can issue certificates which represent shares held by the STAK. The owner of the certificate is entitled to the economic benefits on the shares it represents. For example, if the company issues a dividend on its shares to its shareholders, the STAK receives the dividend, but is obliged to distribute it accordingly to the holder of the certificate.
By issuing certificates to your colleagues, you make it clear that they share in your organisation’s profit, without relinquishing control of the company. Essentially, the legal and voting rights connected with the shares stay with the STAK, while the economic rights connected to the shares are granted to the colleague.
So, what’s the catch? Certificates relate to the value of the corresponding shares in the company, so of course, if the company goes bankrupt, the value of the depository receipt likewise plummets. Using a STAK to issue certificates, therefore, represents a leap of faith. In other words, you and your colleagues commit to your shared success.
And how about SARs (Stock Appreciation Rights) or phantom stock?
SARs provide the right to the increase in the value of a designated number of shares, paid either in cash or in shares. Phantom stock simply pays a future cash bonus equal to the value of a stated number of shares, granted at the end of a specified period of time. Both are taxed as ordinary income, deductible by the employer, once the colleague exercises their right to the benefit.
Conceptually, SARs and phantom stock options are similar. They both hinge on a certain level of trust from the colleague that the company will fulfil their promise. As the leader of a startup, it can be tough putting funds aside for this purpose rather than directly into the business. Both options are nonetheless attractive to startups, particularly as they don’t use actual stock and dilute the share price less than conventional stock plans. As the compensation is tied to the company’s performance, colleagues know that the work they put into building your business with you will come back to reward them.
But what about…?
Compensation is complex, and I urge any business leader to pursue the right scheme for them. As a founder, long-term compensation plans are invaluable for your startup toolkit. Once implemented, they can help not just in attracting staff but in retaining them too. Building a business from the ground up can be overwhelming for everyone involved, but sealing your appreciation for those who choose to follow you on your venture is one of the best first steps your business can take.
That’s why we have created this handy guide, which every startup founder can download for free from our website. It contains an overview of the most common schemes and its pros and cons for you and your colleagues. Click here to download.
As with all things legal, don’t take my word for it. Ask your legal advisor for actual legal advice 😉