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 six: Make sure you know about EMI Options
I was delighted to receive a ‘reader’s request’ this week (which shows that at least someone is reading this blog!).
The subject suggested, EMI Options, is not shares in a UK record label but are in fact known as “Enterprise Management Incentive Options” which represent a good way to incentivise and lock-in key staff.
As per one of my earlier blogs the golden rule if you have set up your own business is “never give away equity” but consider EMI Options to those people who are helping you build the future value of the business (and who a prospective buyer of your agency will want to see are incentivised to stay after a sale).
In short you provide the employee with an ‘Option’ to buy shares in your company based on a base value that you mutually agree at the time. So if you have already spent 5 years building the value of the company to say £5m, you don’t give them the benefit of your hard labour before they joined you. (Note that you will likely offer a minority discount of e.g. 30% as you will still have the decision-making in a future sale and you will want to make the offer attractive.)
So if an employee is awarded 5% options for a base price of £3.5m and the company sells a few years later at £10m – they receive 5% of £6.5m which comes to £325,000.
As long as you have pre-registered the scheme in advance (especially the base price) with HMRC then the employee will be taxed at only 10% provided that the shares are sold a year or more after the grant of the option, and the holder has been a director or employee for a year or more prior to the sale.
Your company will often be able to claim a deduction against corporation tax for the full amount of an employee’s option gains.
You will need to arrange for a formal Options Agreement and I highly recommend that you stipulate that the options lapse if the employee leaves the company. Some tech companies (who are competing for a small pool of talent) allow the options, or a percentage of them to vest over time, and/or be retained if the employee is a ‘good leaver’. Personally speaking, for a marcoms agency I don’t think that is required.
Also you can offer small ‘chunks’ of options e.g. 0.2% to specific people who have helped you along the way in a meaningful way eg have joined your ‘Board’ but beware that if they are not employees or Directors they will miss out on the tax relief and it could increase your company’s tax obligations.
Here is a quick check-list to see if your company qualifies:
· Your gross assets are less than £30m
· You must be independent– it must not be a subsidiary of or controlled by another company
· You must have a permanent establishment in the UK
· You have less than 250 employees
· Shares used must be ordinary shares – but they need not have all the rights of ordinary shares; so, for example, they may have no voting rights attached
We worked with Kingston Smith, our excellent accountants, to create our scheme so please feel free to email Esther Carder if you would like some professional advice on the matter.
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
Tip no 4: never ever give away equity
Tip no 5: know about Entrepreneur's Relief