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Why sharing might not always be caring in a small business

15th October 2021

Nox is a project manager for a small marketing consultancy. It’s really a two-person business, with owner Sam (not their real names) offering the experience and knowledge to guide clients, while Nox manages the media projects that ensue.

But Nox could also help attract new business, as she is young and black and has a different network from Sam’s. She has indeed recently brought in a promising client, so Sam is keen to incentivise her.

He would like to increase her salary, knowing she could earn more in a larger company; but increasing Nox’s salary is risky. He would need to maintain that level permanently, and he cannot be sure that she will be able to continue finding clients. As the owner, he carries all the risk of paying the overheads, including Nox’s salary, regardless of what comes in. Money has to be earned before it can be spent.

He already offers her a bonus for bringing in new clients and has added the clever idea of a further bonus if they continue to pay fees for at least three months. Nox is delighted with this and is becoming more entrepreneurial.

Nox has access to the company’s books and helps run the business as if it were her own. So why not offer her a share in the business? That is tricky. There are several reasons why entrepreneurs avoid giving away equity – unless they are in a fast-growth business and need investors.

Firstly, there is the matter of trust. A lesson I learned early is to be very wary of entering a partnership. Too many people I know have been cleaned out by partners they trusted.

Secondly, many young people would probably prefer to receive money now from a profit share than wait for the uncertain prospect of a bigger benefit someday in the future.

And thirdly, equity brings tax complications. A family IT firm I know has allocated 10% of its shares to the CEO, who is not part of the family. Now they are looking into offering the chief developer a similar opportunity over five years. She is excellent and they want her to feel so much part of the firm that she will never leave. But if they award her shares it will be regarded as remuneration and she will have to pay income tax on them – even without realising any of their value. That’s no incentive!

And what professional wants to give away part of their practice anyway? Sam’s consultancy is not a growing business with unicorn aspirations; it is one of many small professional services firms that are an extension of their owner, who just wants to make a good living. Complicated and risky ownership schemes are simply not in the picture.

Nox has stayed because she enjoys the opportunities and flexibility of a small business and wants to learn all she can.

But what if she leaves to set up her own business, taking her clients with her? Talented staff understandably often treat their employment as an apprenticeship. They learn all they can from the owner, then leave and set up their own venture. Accepting a lower salary is like a fee for all the learning.

Talent is one of the big three factors in entrepreneurial success, alongside finance and markets, so entrepreneurs need to be smart in attracting and retaining talented people. Employees who benefit directly from the success of the enterprise will be more engaged, and for that profit-sharing is the simplest, and usually, best option. But that won’t stop some of the more ambitious and entrepreneurial staff members from taking their training and leaving. It’s a contribution to skills in the economy and one of the many costs entrepreneurs have to carry.

 

Jonathan Cook is a counselling psychologist and chairman of the African Management Institute. He is also the host of AMI’s weekly Rise reflection series focused on supporting you in your business and your personal wellness.

This article was originally published on BusinessLive on 13th September 2021 and is republished with permission.


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