Britain's tech businesses have much to gain from the Government's drive to encourage employee share ownership, writes Liz Hunter of the RM2 Partnership (www.rm2.co.uk).
Britain's technology sector is defying economic gravity. As core industries shrink or stall in the face of economic stagnation, software companies, internet ventures and digital media firms are flourishing; creating jobs, racking up profits, and generating the elusive grail of economic growth.
Unsurprisingly, David Cameron has moved to capitalise on the sector's potential, pledging to turn East London's "Silicon Roundabout" into "one of the world's great technology centres". With the Capital's tech hub boasting an average of 15 employees per company, it's clear that smaller start-ups will be at the forefront of this drive.
Commentators like the Observer's John Naughton, have questioned how far Government policy can turn the UK into "the most attractive place in the world" for innovative firms to set up. Naughton argues that "watching politicians trying to promote technological innovation is like observing a group of maiden aunts trying to persuade the local teenage layabouts to take up yoga...the poor dears mean well, but they really have no idea what they're doing".
This may be true of proposals like "creating zone land for science parks". But one Government initiative announced in recent months fits perfectly with the efforts to encourage tech start-ups. It is not specifically targeted at tech firms, but its ethos chimes with the experience of successful start-ups across the country. I'm referring to the Cabinet Office's commitment to create and stimulate a "John Lewis economy".
Nick Clegg has called this policy "one of the Government's top two priorities for growth", citing a report from Cass Business School showing that companies where employees have an owning stake have higher rates of staff satisfaction, lower rates of absence, and higher rates of staff loyalty. Unlocking these benefits will be fundamental to the growth of the tech sector.
This is because successful tech start-ups grow quickly, expending blood sweat and tears over an intense but comparatively short period. One such tech firm, with which RM2 is working, turns over around £1 million and plans to sell in less than three years for £40 million. In business terms, growing a tech start-up is not a marathon but a sprint. This sprint can only be completed when staff stay on side.
This is important in the early days - imagine that in 1979 Steve Jobs got fed up and told Steve Wozniak they couldn't use his garage any more - but it's also key for the next wave of lieutenants that speed a firm's development. Yahoo's new CEO Marissa Mayer was the 20th employee at Google, and was instrumental in developing its search, email, and mapping products. What if Yahoo had tempted her ten years ago?
Successful tech firms keep staff motivated, keep them on the payroll, and make rewards available when their work comes to fruition. Employee share ownership is an extremely effective way of doing this. If an employee has an owning stake in a company which is working toward a sale, they are more likely to stay and be motivated to exceed the business' objectives.
One-off bonuses, a more traditional incentive, fail to align the incentives of a business and its staff . Cash rewards incur significant tax and national insurance charges and can seriously dent cash-flow, leaving both sides out of pocket. Preserving cash whilst aligning rewards to performance and any seed funding investor requirements makes share schemes a valuable tool for early-stage, talent dependent ventures.
Tech start-ups are quickly recognising the benefits of employee share schemes. RM2, which advises businesses on the design, implementation, communication and administration of such schemes, has seen a surge in interest among tech start-ups and has guided a large number through this process. Examples include zeebox, which launched in the UK last year and has attracted major backing from BskyB, and Rebound Technology which has grown by 69 per cent to feature for the third year running in The Sunday Times Profit Track 100. These companies have kept key people on board in a way that reduces the business' cash-burn rate; these people have then shared in the benefits of their collective success.
Government may not, as John Naughton argues, be able to "offer tax-breaks and other incentives to firms and then sit expectantly awaiting "innovation"." But by following through on its commitment to support firms in offering employees an owning stake, it can give a significant boost to the tech sector. Tech start-ups are prime candidates for employee share ownership. If the drive to build a "John Lewis economy" supports such businesses in doing so, it will make a real difference to one of the most vibrant parts of the UK economy.