Revolut, one of the UK's leading and most valuable fintech companies, is reportedly preparing to enable its employees to sell shares worth hundreds of millions. The estimated $500 million secondary share sale will be coordinated by investment bankers at Morgan Stanley.

So, what does this mean for Revolut's employees and what lessons can startups learn from this move, particularly in terms of offering share options to their teams?

The Story

Revolut, a powerhouse in the fintech sector with over 40 million customers, is lining up for a significant secondary share sale. This transaction will according to articles in the FT and Sky News enable employees to sell shares valued at around $500 million. Significantly, this move is reportedly not about raising new capital for the company but specifically allowing employees to sell their shares and cash in on their equity. This is not the first time Revolut has conducted secondary share sales of this kind, having done so following its 2021 Series E round.

Nik Storonsky, Revolut's co-founder and CEO, is aiming for a valuation of at least $33 billion, consistent with their 2021 primary funding round. This secondary sale is expected to be restricted to company employees, which would presumably be very good news if you are an employee at Revolut holding shares. However, Revolut will have strategic drivers behind this type of decision, which we can explore here, and it is unlikely to be as simple as Revolut offering a gesture of goodwill to its team.

How Might the Employees Benefit?

While the news must be exciting for Revolut staff, there's still limited transparency on participation.

What we can be certain of is that in order to benefit, a Revolut employee must either hold shares, or vested share options to benefit from a secondary share sale. A large number of employees will hold this benefit and it is likely a key part of many individuals’ compensation packages as part of a company-wide share incentive scheme.

To give a conclusive answer on this strategic move by Revolut, we would need to know answers to various questions, such as:

• Are former employees entitled to hold shares, and will they be entitled to participate? We would guess that they won’t, but if not, this does raise legal questions about unequal treatment of shareholders.

• Will all current employees holding shares (or vested options) be entitled to participate proportionately to their shareholdings, or will senior staff or certain groups of staff be ‘selected’ to sell shares as part of their compensation packages? For example, is the core benefit restricted to only the most senior team members? Any company, however large, would need to factor in the emotional impact of this sort of decision.

• Will employees be entitled to simply sell shares and keep the proceeds unconditionally, or will this be tied into ongoing compensation and equity packages? For example, will employees receive all proceeds right away in a simple share sale transaction, or might they be paid over time as part of a salary increase (meaning that if the employee leaves, the benefit is lost)?

From a strategic perspective, this could be predominantly driven by different factors, for example:

1. Requirements of the company’s employees to stay motivated and on board (i.e. an internal cultural requirement and a way of effectively paying significant bonuses)

2. Needing an investment bank like Morgan Stanley to be on its cap table as part of Revolut’s ongoing efforts to be recognised as a ‘bank’ in the UK (i.e. a regulatory requirement)

3. A strategic desire to achieve a certain high company valuation for these secondary sales, as a benchmark ahead of further future funding where they would hope to at least match that high company valuation.

We can only speculate until details are disclosed publicly and likely most of them never will be. However, from a startup and scaleup perspective, the speculation is almost as important as the reality, because it gives us an opportunity to investigate different scenarios and apply them to our own work in the startup sector in the context of share options and equity incentives for team members.

Where does the money go in a secondary sales Vs standard investment round?

In this secondary share sale as reported, Revolut will not itself receive any of the $500m from Morgan Stanley - it will go directly to staff.

In a startup or scaleup context, this is almost unfathomable. With the funding landscape as competitive as it is, the thought of being able to raise $500m but have none of it be invested in the company seems impossible. However clearly Revolut are playing in a different arena.

The general rule is that when startups fundraise, the funds are invested in the company in exchange for new shares in the company. The issue of new shares is a dilution event for the company, with existing shareholders being diluted by the new one(s).

That being said, secondary sales can happen in a startup and scaleup context as part of funding events as part of founding teams and/or senior leadership selling some equity in order to receive some sort of payout beyond their often tightly controlled salaries.

Key Lesson from Revolut - The Importance of Employee Share Option Plans

Revolut's move underscores the importance of Employee Share Option Plans (ESOPs). The most common option plan for startups and scaleups are Enterprise Management Incentives (EMI) schemes. These plans are crucial for startups aiming for rapid growth and eventual exit.

Why?

• Attract Top Talent: Offering share options is table stakes to attracting top talent into the startup ecosystem. Potential employees look for companies where they can share in future success.

• Boost Motivation: Share options align the interests of employees with those of the company. Employees are naturally more motivated to contribute to the company's success when they have “skin in the game”.

• Retain Key Players: Offering equity can help retain key employees, reducing turnover and ensuring continuity in growth phases. Designing an EMI Scheme around a particular goal (e.g. working together towards an exit) is important to ensure the EMI Scheme serves its purpose, and doesn’t just serve to needlessly give away shares.

Building a Culture of Ownership and Drive

Share options are a widely used mechanism in the startup ecosystem, offering employees the potential for life-changing financial gain if things go well. This aligns their goals with the company's success, fostering a culture of ownership, agency, and dedication. When employees feel directly invested in the company's growth and prosperity, their motivation and engagement naturally increase.

Equally, the share options are generally an incentive for long-term loyalty and staying with the company, so vesting (or reverse vesting) are generally necessary to ensure the effectiveness of share options. By ensuring that founders and key employees earn their shares over time or upon reaching specific milestones, vesting helps maintain commitment and stability within the team. This strategic tool not only rewards long-term dedication but also ensures that the company's most valuable contributors remain motivated to drive the business forward.

Four year vesting with a one year cliff?

Four year vesting with a one-year cliff seems to be the market standard, but is it right for you? Rather than simply opting for standard vesting schedules it is always up to the founders designing the scheme to ensure the scheme fits their purposes. Would you be okay with an employee leaving after 2 years with 50% of their granted options? If not, then perhaps the 4 year vesting with a 1 year cliff model isn’t right for you and you might need to consider alternatives.

Further Legal and Strategic Considerations

When structuring equity plans, startups must navigate several legal and strategic considerations:

• Allocation of Option Pools: Creating an appropriately sized option pool and appropriately designed option scheme is essential for ensuring an EMI Scheme is fit for purpose. For example, overestimating the number of shares needed can lead to unnecessary dilution, while underestimating can limit the company's ability to attract and retain talent​​. For example, choosing the wrong type of vesting schedules or leaver rules can result in needlessly giving away shares before you have achieved your goals.

• Types of Share: Do share option holders receive standard ordinary shares, or should they hold a separate class of shares without voting rights?

• Investor Consent: Involving investors in major company decisions can protect their investments and align their interests with the company's long-term strategy. Sometimes investors will have a right to approve an option scheme before it is adopted, especially if adopting an option pool causes dilution on the cap table. We’ve written another post about share dilution here.

Many of our clients have successfully implemented ESOPs based around their own bespoke goals, rather than simply adopting the ‘standard’ which was not going to fit for them.

Cap Table Mechanics with EMI Schemes

When adopting an EMI Scheme, the company adds a pool of equity on to the cap table which is dilutive of all existing shareholders. If you adopt the option pool as part of a funding round, it will not be dilutive on the new investors.

If you adopt the cap table before the first funding round where only founders hold shares, it is only dilutive on the founders, and in that case it is arguable for founders to retain an option over any shares in the pool which are not allocated at an exit event. This raises some difficult questions around incentives of founders to allocate the pool at all (i.e. are they conflicted?) but it is a question we see arising more and more frequently in funding rounds.

Actions for Founders to Capitalise on the Revolut Strategy

1. Implement an EMI Scheme: If you haven't already, consider setting up an EMI scheme. These schemes are tax-advantaged and can be a powerful tool to attract and retain top talent. They allow employees to buy shares in the company at a fixed price, potentially benefiting from any increase in the company's value. You can read more on how to set one up here.

2. Educate Your Team: Make sure your employees understand the value of their share options. Regularly communicate how their equity works, what it could be worth, and how it aligns with the company’s goals.

3. Plan for Liquidity Events: Just like Revolut, plan for potential liquidity events where employees can cash in their shares. This could be a secondary sale, an IPO, or an acquisition. Having a clear path to liquidity and sharing these internally makes your equity offerings more attractive.

4. Balance Dilution with Growth Needs: Be strategic about issuing new shares. Understand the impact of dilution on existing shareholders and balance it with the need for growth capital. Use modelling tools to project the impact of different funding scenarios on ownership percentages. We’ve written another post about share dilution here

5. Consult Legal Experts: Work with legal advisors with expertise in startups to draft clear and fair terms for your equity plans. Working with Accelerate Law can ensure that your EMI Scheme is really ‘put to work’, like any investment, so that it actively contributes to the growth and success of your company.

Final Thoughts

Revolut’s planned secondary share sale is a significant event, providing valuable insights for startups. It highlights the importance of well-structured equity plans and the strategic use of share sales to reward and retain talent. For startups, understanding and implementing effective equity distribution mechanisms can be a game-changer in attracting and retaining talent, driving growth, and ensuring long-term success.

Looking ahead, we may see secondary sales become more common as companies mature and seek to provide liquidity. By staying informed about these trends and strategically implementing ESOPs, startups can position themselves to attract top talent, foster a culture of ownership, and achieve long-term success.

Accelerate Law provides flexible strategic and legal support to startups end-to-end through angel investment rounds and VC funding rounds, which includes supporting with SEIS and EIS matters, flexible funding for example through Advanced Subscription Agreements, and drafting and negotiating investment terms from term sheets through to completion. Accelerate Law also specialise in EMI Schemes for startups. Contact us here to find out more.