The need to attract, retain and motivate key members of your team (whether they are current or potential managers) is critical to the success of your business.

An award of shares or options can be a great way of achieving this, but there are a number of key things to think about before moving things forward and communicating your plan to your team. Furthermore, there are a number of legal and tax issues to get your head around, but the first step is to consider the following:

1.  Dividends, capital growth and voting rights – do you want to share these with your team?

Whilst this question may seem a simple one, it can often be the trickiest to answer. Even if your instinct is to answer this with “no”, there are still ways of implementing a share scheme with your objectives in mind. For example, you could offer the team share options over a different class of share, although this may cut across the integrity of your company’s share capital and not have the desired motivational effect. Alternatively, you could offer your team “exit-based” options, which would mean that your employees would only become shareholders immediately before a sale of your business, and could then share in the proceeds of that sale with you.

Whatever your answer is to this question, there is likely to be a scheme that can be designed to suit your needs.

2. What types of employee share scheme are there?

As mentioned above, there are a number of different types of scheme that you could adopt. Some of the most common structures we implement are:

• shares being acquired by the team on day one – getting them to think and act like business owners;
• share options vesting over a period of time or linked to specific performance conditions – keeping them motivated towards your ultimate goals; or
• exit-based options which only vest at the time of a sale of your business – help your team help you to drive growth in which they can participate in if you sell your business to a third party.

In terms of the scheme itself, there are a number of tax advantaged share schemes available (subject to strict statutory requirements) including:-

• a Company Share Option Plan (CSOP) which allows up to £30,000 worth of shares to be put under option (this can be a useful scheme to implement if your company does not qualify to grant EMI options – see below);
• a Share Incentive Plan (SIP) where free shares worth up to £3,000 per annum can be awarded to employees.
• Save As You Earn Share Scheme (or SAYE Scheme) where employees enter into a savings plan that allows them(on maturity) to pay the exercise price on share options that can be granted at 85% of the initial market value.

Whilst these schemes may sound great, generally they are much more expensive to establish and administer, and as such only tend to be seen in large companies, particularly those that are listed.

It is the EMI (Enterprise Management Incentive) Scheme which is overwhelmingly the most popular for private companies (see point 3 below).

Many companies and employees will qualify for tax-advantaged schemes, including an EMI Scheme, but if not, you could award your employees a non-tax advantaged (or unapproved) share option.  Whilst this may result in an unfavourable tax charge for your team (they will pay income tax on the increase in value of the shares and your company will have to pay 13.8% employer’s NIC), the advantage of the unapproved share option is simplicity.

3. What are the advantages of an EMI Scheme?

The key tax-advantage of EMI options is that they ensure that the growth in value of the options from the date they are granted to your employees to the date the options “vest” and the shares are acquired by the employees accrues without triggering an income tax liability. This means that you could grant options to your team at today’s value, and this would set the exercise price for the shares even if they aren’t acquired until, say, year 3.

4.  What about the statutory requirements?

Whilst there are a number of statutory requirements which must be met in order to establish an EMI Scheme, they are not as extensive as the tax-advantages schemes referred to at 2) above. Your company must qualify, as well as the employees to whom you wish to grant options.

The first of these is the trading requirement, and there are a number of excluded trades (such as property investment or share dealing).  There is also a size limit, so your company must not have gross assets exceeding £30m, and it must have less than 250 employees. Your company must be indepe3ndent (i.e. it must not be a subsidiary), and there is also a limit of the value of the options to be awarded. As to the employees, they must be contracted to work at least 75% of their total working time with your company (or not less than 20 hours per week).

For further information on employee share schemes, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com