Posted Monday 22nd July 2024
At Joelson, we often get asked to advise Founders on ways to incentivise their employees to work hard for the business and build value for shareholders.
Such types of arrangements are commonly called Long Term Incentive Plan (LTIP). It is important that Founders think about the following 4 key points when establishing a LTIP:
1) Setting clear, achievable and measurable performance metrics
This includes both financial metrics such as return on equity as well as non-financial targets such as customer feedback (noting that the appropriate metric for each participant will depend on their particular role and responsibilities.)
2) Equity vs. Cash Compensation (and addressing both short-term and long-term objectives)
Equity-based incentives, such as shares, align employees’ interests with shareholders and encourage long-term commitment, but cash-based incentives may provide more immediate rewards for employees.
3) Vesting period and payout structure
Typical vesting periods range from three to five years, and the payout structure should be clearly defined, specifying how and when employees will receive their rewards.
4) Leaver provisions
Effective LTIPs must include provisions to protect the Company from leavers, while also being reasonable for employees. The factors which are important to consider here is whether an LTIP has vested and the circumstances of the employee’s departure (commonly referred to as good leaver/bad leaver provisions).
Do get in touch with our Corporate team if you are a founder looking to set up a LTIP and are seeking advice on structuring.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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