Why sharing might not always be caring in a small business
Nox is a project manager for a small marketing consultancy. It ’ s really a twoperson business, with owner Sam (not their real names) offering the experience and knowledge to guide clients and Nox managing 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 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 she will 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.
She 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.
First, there is the matter of trust. A lesson I learnt early is to be wary of entering a partnership. Too many people I know have been cleaned out by partners they trusted.
Second, many young people would probably prefer to receive money now from a profit share, than wait for the uncertain prospect of a bigger benefit some day in the future.
Third, 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 like 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, profitsharing 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.