Before you scale your team: what promises can you afford to keep?

“You'll get a couple of percent.” It's the easiest sentence a founder will ever say, and one of the most expensive to leave unwritten. Said too casually, it becomes a promise that can turn into a sizeable tax bill for the company and the person who earned it, at the exact moment the business can least afford the distraction. Chris Tysoe, part of Grant Thornton UK's Reward Advisory Services team, explains how founders need to get the timing right from a tax perspective.

Before you scale your team

There’s a point most founders reach: you’ve built something from nothing, covered every role in the business yourself, and just realised you can’t keep doing that. You can’t keep leading the design team, the finance function, procurement and operations while also trying to scale. Now is the right time to bring in the dedicated expertise, perspective and commercial challenge that comes with hiring other senior leaders that will help take the business to the next level.

By the time you’re ready to act, the decision to scale is usually already made, though the question of who you actually need will have now become critical. The fight for the right people is fierce, and getting the right fit can be the difference between a hire who moves you forward and one who doesn’t. 

Bringing in that difference-making hire will require a competitive offering, and payroll is usually the biggest cost in that equation as a business scales. Most growing businesses can't stretch cash alone to match market rate for senior hires, so what other enticements are available? The most obvious answer is often in equity. Senior talent will expect a real stake in what they're helping build. It's also common alongside an investment round. Once private equity or an investor is in, the leadership team is usually expected to hold an interest in the business too, everyone striving for the same goal.

Where good intentions come unstuck

It is undeniable that the offer of a real stake in the business can be a hugely effective tool in the recruitment and retention of talent within a rapidly growing business. The trouble starts in the gap between that early promise and a plan: a well-intentioned comment about shares, made long before there's a document, a valuation or a structure behind it. That promise still needs honouring eventually, usually right when the business can least afford the distraction and the additional cost: at the point of investment or sale.

We also see founders giving away equity too early, or being too generous from the outset, using up the pool they'll need for the next hire or the one after that. And some choose a cheaper, DIY route over getting it structured properly. It may look fine at the time, but will it hold up when it matters most? While the theory is simple, the devil is in the detail when it comes to execution.

Three steps to getting the balance right

Getting this right can be a business-critical decision and should not be rushed into:

1. Be clear on where the business is heading: investment, a trade sale or succession. The route shapes the plan.
2. Look at the whole reward picture: founders often default to salary and bonus. Widening that out (equity, pensions, flexible benefits) gives more options and a package that fits the team you actually have.
3. Take advice: Getting the valuation and documentation right is crucial in achieving the desired tax position and, thus, the overall outcome.

What this looks like in practice

Take a real example. Ahead of an £80 million sale, a founder had promised a senior hire "a couple of percent," said in passing, never written down, never valued. That's usually where this goes wrong.  The promise sits there, understood but undocumented, while the deal clock keeps ticking.

Formalise it late and the numbers turn against you. Instead of the capital gains treatment everyone assumed, the hire would have faced the cost of income tax and National Insurance contributions (NIC) on value they saw as 'theirs'. That’s a six or seven-figure hit, lost purely on timing.

Structuring the promise as an Enterprise Management Incentive (EMI) option changed all that. The hire now had paperwork that held up to scrutiny and locked in the tax treatment they'd been promised. When the sale completed, that early move turning an informal IOU into a documented, tax-favoured stake, turned what could have been a seven-figure cost into a seven-figure saving.

The figures will differ every time. What doesn't change is the choice in front of you. Formalise the promise now, locking in the talent you need for the next part of the journey, or let the clock decide the price later.

Get any of this wrong and the cost is not only financial. A management team who find out they are paying income tax and employee NIC on value they thought was capital gains can have a big impact on motivation, and that can show up in due diligence too. 

The best time to start is now

So, before your next senior hire signs anything, work out where the business is heading, decide what you can genuinely afford to offer, and get it documented as soon as you can. This is not a tax decision on its own. Get the commercial plan, the people plan and the tax position moving together, and the timing takes care of itself.