Many people in our industry contemplate setting up their own agency. The rewards both financially and emotionally are high if you succeed and even the journey can be fun even if you don’t arrive at your destination. What is the worst that can happen? You lose some money and you go back to working for someone else.
First the health warning: 8 out of 10 start-ups fail. But that should not stop you trying – after all, life is not a dress rehearsal and you don’t want to look back when you are older and wish ‘if only…'
The key thing is to mitigate the risks and maximise your opportunity of success. Over the next weeks I will be sharing tips I have learnt over the last seven years that I wish someone had told me when I was contemplating leaving the comfort zone of working for the Saatchi’s after 15 years
Tip number four: Never give away equity
Fortunately this was the one piece of advice I was given by my business partner, Alan Jarvie, before we started. He bought me the book ‘How to get rich’ by the late Felix Denis (which is worth reading if you are thinking of starting your own agency). The one lesson I remember vividly from it seven years later is 'never, ever give away equity'.
The reason you and your partner/s are starting your own company is that it is yours – and ultimately you will be doing the hard graft to make it successful so should expect to reap the rewards as well as retain control.
There will be times along the way when you might want to bring people on board for strategic reasons. And it will be expected by the time you want to exit that you will have a second tier management on board who are incentivised to stay on by having a stake in the company. So you should plan to have an Options Pool of 15-20% of the equity that will be theirs when you sell.
The main differences between giving people options versus shares are:
- Options allow people to be rewarded by the future growth of the agency from when they joined the company i.e. the value of the company that has been built up before they arrived is not something they benefit from.
- An Option can only be excercised by a financial event such as a sale – so there is no liability to pay out when you don’t want to.
- Option holders do not have voting rights or get paid dividends.
- The Option Agreement can state that any option lapses if the individual leaves the company. The whole point of issuing them is to reward loyalty, so this clause is key.
- An Options Scheme can potentially qualify for EMI status with HMRC which brings a host of tax benefits to the company and the individual. You can find out more here
Setting up an Option Scheme is not something you should do from the outset as it is not cheap and is not necessary at that time. There may be people who you want to bring into the company at launch or soon after who are not like the 'founders' who receive shares, but you may want them to feel ownership of your new venture. I would recommend adding a clause in their offer letter that reads 'After three years employment you will be eligible to join the company’s Option Scheme.'
But the one thing I want you to remember from this article is under no circumstance ever, ever, ever give away shares.
Next week’s tip will be the importance of understanding the tax system.
If you want to hear about the high and lows of our launch you can read it here
Tip no 1: treat yourself as you would a client
Tip no 2: set up with a partner you know and trust
Tip no 3: invest in good advisors from day one