Incentivising the Employees

Posted on: June 8th, 2012 by admin

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When Facebook’s shares listed on the Nasdaq Stock Exchange on 18 May 2012, the company was valued at a little over $100 billion. This was an astonishing achievement for a business that was only established in February 2004. Mark Zuckerberg, the 28-year-old founder of Facebook, had a net worth of almost $20 billion on the day of the initial public offering (IPO). Less well known is that a significant proportion of Facebook’s 3,000 employees – perhaps as many as a thousand – became paper millionaires after the IPO. This was obviously because the founders of the company realised the value of providing generous incentives to their original employees.

Worldwide it has long been recognised that Employee Share Ownerships Plans, or ESOPs, can be an effective tool for motivating and incentivising staff by providing a mechanism for employees to have a significant stake in the company. The philosophy behind an ESOP is simple: a company in which employees think and act like owners, creates the potential for synergies that enhance the company’s performance. The idea is that shareholders, including the employees, benefit by enjoying the increased financial returns that such a company creates.

In a previous blog, we mentioned that the founders of CapeRay negotiated an investment of $2 million by the venture capital business unit of the Industrial Development Corporation (IDC) to begin commercialisation of our slot-scanning digital X-ray technology for the detection of breast cancer. As part of its negotiations for a one-third equity stake in the business, the IDC made it a requirement that the founders of CapeRay establish an employee share trust that would be for the benefit of all staff.

As can be seen in the diagram below, the IDC owns 33% of the shares, the University of Cape Town (UCT) has 10%, the three founders – Kit Vaughan, Michael Evans and Tania Douglas – own 40%, while 17% of the shares have been allocated to a Trust of which the beneficiaries are the permanent staff. Since more than half the business is now owned by people who have a direct stake in CapeRay’s financial success, we are optimistic that our ESOP will lead to better performance.

Although shareholders will be diluted during any future rounds of equity financing, there is every likelihood that all those with a stake – including members of the ESOP – will benefit as the value of CapeRay grows. Whether it can grow like Facebook will be another matter!

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