Timing is everything; do it before your first finance round

Timing is everything; do it before your first finance round

Warren Buffett famously once said “someone is sitting in the shade today because they planted a tree a long time ago.” If you think about that smarty pants who bought Apple stock in 1999 before the iPhone was trendy, they were essentially the metaphorical tree planter, and are now probably sitting comfortably,under a lot of real palm trees in Palm Springs, sipping on a Pina Colada or two. If you bought Apple today you may have to wait 20 - 30 years to be sitting next to a shrub if you are lucky. Time is a construct, but at the same time it's everything. The same logic applies to setting up your EMI scheme and let’s be honest no one wants sunburnt employees because they planted their tree in the wrong soil or didn’t even plant it at all.

Granting your employees options is an epic perk of working for a fast growing company. Often start-ups cannot pay the same salaries that a big old corporate can offer. However, offering your employees options is an enticing and luring factor to ensure you attract the top talent. By giving your early joining employees the option to be shareholders you are allowing them to share in the spoils for everyone's joint hard work.  The idea of having a slice of the pie is meant to be the biggest motivating factor for employees in start-ups. Far too often we see it done wrong, delayed or simply overlooked and what was supposed  to be the biggest motivating factor, instead turns into one of the biggest demotivators.

One of the easiest ways to ensure that this perk is fully optimised is by creating your EMI scheme sooner rather than later. As they so cliche-ly say, the early bird catches the worm.

When you create your EMI scheme you grant your employees options. These options are priced based on the current valuation of your company. The earlier you do this the lower the valuation - simple concept right? Yet so many founders fail to realise this, putting it off, until it’s too late to benefit from your low valuation. It’s probably the only time in your start-up journey where having a low valuation is a benefit, so making the most of this time period is key. If your company hasn’t been around for too long, it’s fresh, new and vibrant, you can grant options to your employees based on this very newness, which is why we recommend getting all your ducks in a row before your first round of finance.

As your company grows, the valuation of your company also grows - which is great, because it means your business baby you’ve been hustling and working around the clock is succeeding. But that also means that if you haven’t set up your EMI scheme for your employees until now, you’ve only shot yourself (and them) in the foot, as the price to strike their options is more expensive.  The price of their options is locked in when the EMI scheme is created and is based on the valuation of the company at that point in time. If created before your first financing round, this could be next to nothing, resulting in less monetary obligations for your employees in the future. If you’ve waited until after, you’ve essentially made it so they have to pay - an often - significant amount more to participate in the options scheme. Which doesn’t make it quite as sweet of a deal as if you’d just had it sorted earlier.

There is only an upside from doing this early. Time and time again we see that it is left too late and employees end up granted options based on a higher valuation. This means that they have to pay more to strike their options, leaving employees feeling bitter and unmotivated. Remember that feeling when you delayed buying tickets to your favourite band and you ended up paying double? Well don’t make the same mistake with your EMI scheme.

We know that founders have so much on their plate when starting a business and this often falls to the bottom of the to do list. We get it, you’re busy trying to create an app for sharing the best ripe avocado locations with your friends, or changing the way we create plastic by using pineapple leaves - you’ve got bigger fish to fry (or avocados to find).

However, just like that niggly feeling of not changing the oil in your car, you do not want to put this off for any longer, otherwise the whole car goes KABOOM and you’re left with a lemon, rather than a Pomelo (see what we did there? ;).

So, let us take one thing off your plate, we happen to be in the business of sorting all this out for you, leaving everyone involved, content, happy with no sour-lemon faces to be seen - as that's not the kind of slice you want to give to your employees.

Now remember your employees will thank you 20 years from now when they too are sitting under the shade somewhere tropical sipping on a cold G&T under some fully grown palm trees, thanks to your foresight.