Employee shares are no-longer a differentiator for companies… regular liquidity events can be

Knowledge Base
Wednesday, November 22, 2023

Author: Ben Weaver

Startups have been offering staff shares since the late 1950s but the practice has only really stepped out of Silicon Valley into the mainstream in the last decade or so. Today, many companies, from new startups to established conglomerates, offer shares to staff to improve remuneration, reward loyalty and encourage them to feel more invested in their companies. 

A strategy which, by all accounts, works. Recent figures from the UK Government show that almost three quarters of businesses with an employee share scheme (ESS) say it has helped them retain and recruit staff. 

As a result, ESSs are on the rise. According to a report from the Employee Ownership Association, the popularity of employee equity is growing by more than 10% a year, while earlier this year, the Chancellor, Jeremy Hunt, announced that the Government was looking into ways to bolster the number of companies offering shares to staff, viewing it as a way to “boost motivation” and breathe new life into into the UK economy. 

While this is undoubtedly welcome news, we couldn’t help but notice that missing from all this was any mention of how those shares would be liquidated – and the impact that in itself could have on growing the UK economy. Information that was also noticeable by its absence in Mr Hunt’s Autumn Budget.  

Traditionally, equity compensation has been considered a long-term reward, a promise of future wealth contingent on the company's success. This approach made sense in an era where IPOs were more common, and the journey from startup to public company was faster. 

But those routes to liquidity are harder to come by these days. The IPO market is a shadow of its former self and companies are staying private far longer than they once did. While this can be lucrative for founders and their investors who can sell parts of their vested shares at each funding round and get some shorter-term liquidity, it leaves employee shareholders in liquidity limbo. The longer this goes on, the ability of employee shares to retain, recruit or motivate  will surely wane as shareholders grow tired of waiting for a gain that never comes. 

What we would like to see companies doing in order to continue to differentiate equity packages, and ensure they remain as a talent tool is guaranteeing some form of liquidity event after a certain time. By offering employees regular opportunities to liquidate a portion of their equity, companies can transform what was once a vague promise into a tangible asset, clearly differentiating themselves from competing business. Private companies could use the vesting process typically applied to equity compensation schemes to also trigger liquidity events. 

For example, after a 1, 3, or 5-year period of employment, employees could be permitted to sell a portion of their shares during a trading window that the company periodically specifies and conducts. At Asset Match, we are able to facilitate liquidity events of this nature and over the last 12 years, we’ve carried out more than 750 periodic auctions and transacted over £125m. 

For companies concerned about inviting unknown shareholders into the business, these auctions need not be a general sale where anyone can buy in, but rather an internal market with specified sellers and buyers. There’s also no guarantee of a sale or price, but if a price is settled on, it is decided by an algorithm that pinpoints a fair trade calculated from the median price of all the bids and offers. 

The implementation of regular liquidity events can do more than just provide employees with some additional cash, they can help foster a culture of trust and recognition within the organisation. Employees who see a clear path to realising the value of their equity will hopefully feel more valued and, in turn, more committed to the company's vision and success. 

Moreover, these events send a strong message to potential recruits. They signal that the company is not only forward-thinking in its approach to compensation, but also genuinely invested in the welfare and satisfaction of its employees. Furthermore, for companies that initially gave shares to earlier employees but no longer offer equity to new hires, it could present those new hires with an opportunity to buy into the business. 

From a wider economic point of view, the cashing in of these shares is a great way to let loose some of the trillions of pounds of trapped liquidity the country has locked away. It also facilitates the recycling of cash – especially considering the illiquidity discount (30% to 50% by our estimates) it offers buyers – back into the market, bolstering sentiment. 

For private companies and the government this is one of the ideal scenarios where the right moral decision is also the right business one.