Employee share schemes provide a way for those that you hire to either be given shares for free, or to buy them at a discounted rate, while also gaining a tax benefit.
You don’t have to offer share options, but there are benefits in doing so.
Advantages of employee share schemes
• Staff are more motivated, as they have stronger financial interest in the success of the business. The better the business does, the more their shares are worth
• Team members may feel a better sense of community and belonging, as they’re all invested in the same business
• As an employer, you can use your share scheme benefits as an attraction to new candidates when recruiting for new employees
• If your schemes only pay out after a set amount of time, you can encourage employee retention and have lower employee turnover
• You might be able to offer talented candidates share options as an enticement to join you, or as a counter-balance to a salary offer that is not the highest market rate
Disadvantages of employee share schemes
Admin, control and costs
• There’s a lot of admin and some legal costs involved in setting up and administering employee share schemes and securing any tax benefits for all those affected
• While high share prices should cause a direct positive atmosphere amongst your team members, a low share price could make them feel deflated and even demotivated, especially if their work doesn’t directly affect share price
• With each employee you give shares, your own equity may be diluted, which could may be an issue if you aren’t willing to lose too much ownership. (Many companies set a cap on the level of equity that is distributed to employees to help manage this. They will often appoint a nominee shareholder and/or trustee to hold these shares on behalf of the employees, to liaise with the company’s management and take decisions in these employees’ interest.)
• If you grant voting rights to all employees with shares, this could slow things down when it comes to large decisions such as selling the business. (Many businesses don’t include voting rights for the shares allocated within their employee share schemes.)
• You’re likely to need existing shareholder approval to set up an employee share option scheme
Let’s take a look at the different types of share option schemes:
First, small businesses...
Enterprise Management Incentive (EMI) scheme – SME-relevant, but note the maximum threshold conditions
The EMI scheme is aimed at the smaller 'high risk' company. In most cases, where directors or employees exercise their EMI options and pay no less than the market value of the shares at the date when the option was granted, their entire profit on sale will be taxed under the capital gains tax regime. The applicable capital gains tax rates are much lower than the comparable income tax rates.
An EMI scheme allows an employee to buy shares (up to a value of £250,000), at a fixed price.
There are rules that govern which small businesses are eligible to offer this type of share option scheme. For example, you can only use an EMI scheme if you have gross assets of under £30m and employ fewer than 250 people – for many SMEs, this won’t be a problem.
Additionally, the company must not be a 51% subsidiary of another company or under the control of another company and persons connected with that other company.
The company must also carry on a “qualifying trade”. Most trade should qualify but the company’s activities must not consist of excluded activities such as dealing in land or shares, leasing, receiving licence fees or royalties, legal and accountancy, property development farming and operating and managing nursing homes.
If you do opt for an EMI scheme, you are allowed to use performance-based conditions to determine which employees will be offered the chance to participate in the scheme.
The maximum value of unexercised options over the company’s shares must not exceed £3 million, however very few companies get close to exceeding this threshold.
Want to access this guide?
Already have a Farillio account? SIGN IN
Get unlimited access to 100s of legal resources by signing up to Farillio today.
- Manage your legal documents online
- Well written legal templates by our partners
- Guides to help you understand law
- Legal help available every step of the way