Insights

The adage that no-one cares about your business as much as you do is, unfortunately, quite true.

However, what if your business is potentially also your employees’ business? This has been shown to develop buy-in and improve business performance, especially when targeted towards a specific goal.

Inviting employees to share in the future success of your business potentially provides them with a wonderful perk and is increasingly popular, especially amongst smaller companies trying to secure the best possible talent. Enabling your employees to eventually own shares in your company is likely to build greater loyalty and encourage employees to be more focused and to think more like you; the business owner.

Sounds great, but what does it actually mean to invite employees to become company shareholders? There is quite a lot to consider. For instance, what is the effect on current shareholders; how do you go about launching a scheme; who should be awarded shares; do employee shareholders have voting rights; do they lose their shares if they leave; what is the tax position; can shares be revoked because of poor performance?

This article shares tips and ideas if you are considering launching an employee share scheme.

1. Consider initial status

Do you want employees to actually own shares, or to have the promise of acquiring shares in the future, but at today’s price? The former will mean they are official shareholders and will need to enter into your shareholders’ agreement, and you will need to consider your dividend policy and good leaver/ bad leaver provisions as far as the shares are concerned. The latter is a promise, with incentives attached, and means their status doesn’t change at the outset.

 2. Set clear objectives

Before launching an employee share scheme, be clear about the objectives behind the creation of the scheme. Are you rewarding your key staff, looking for a way to attract new employees, or offering an alternative financial reward? Alternatively, is your motivation more connected to succession planning and creating an opportunity for you to sell some of your shares? These are all valid reasons but they will determine the way in which you set up and manage the scheme.

3. Agree who will benefit

Giving shares to employees is not a decision to take lightly, and the number of shares you give away will have a direct effect on the percentage shareholdings of all shareholders. Consider at the outset the maximum percentages existing shareholders will wish to retain, and how much flexibility this provides in offering shares to key employees which will be of a level that is meaningful enough to incentivise them. Many companies restrict the benefit to a small number of people based on merit and, where share option schemes are used, they often attach performance conditions to the award.

4. Tax advantaged or not

One of the best ways to offer a share scheme is by using an HMRC approved, tax advantaged share scheme. For smaller companies in qualifying industries, EMI (Enterprise Management Incentive), a share option scheme, is the most popular. EMI doesn’t require shares to be bought in advance because it gives staff the option to buy shares in the future at today’s agreed market value, and can be very tax efficient. It typically enables those employees who are granted, and later exercise options, to benefit from entrepreneurs’ relief and pay just 10% capital gains tax on the gains they make when they sell their shares.

5. Think about communication and engagement

Giving your employees a chance to participate in the future success of your company is very helful for employee engagement. Where several staff are involved, many companies officially launch the scheme to ensure everyone understands the value of the opportunity, the long-term strategy and what their obligations are if the share award is conditional upon performance.

6. Consider the future

If you are considering giving shares to employees, or enabling them to exercise share options and acquire shares before a company sale, you will need to include them in the company’s shareholders’ agreement in order to cover the different circumstances that may occur in the future; for example, if an employee leaves the employment of the company. A good shareholders’ agreement will effectively protect the company and other shareholders should relations deteriorate, and will set out what happens to an individual’s shares if they leave the company on either good or bad terms.

7. Giving all shareholders voting rights

Typically, when you set up a share scheme such as the EMI, there are different classes of shares offered on exercise. You need to consider whether, on exercise of their share options, you will wish your employees to have voting rights to fully participate in the direction of the company. This decision needs to be made at the time the options are granted, so in many cases, well in advance of your employees actually receiving shares.

8. Don’t oversell your scheme

It’s great to offer a share scheme but make sure your employees understand that they are not automatically guaranteed to become millionaires as a result. Many people do very well financially from their share options, but it is a long-term strategy and requires a lot of hard work and resilience. Make sure you keep expectations realistic because otherwise, if your company experiences a blip in performance, the negative impact on morale may exceed the benefits of the scheme.

RJP has established many tax advantaged share schemes for companies across the UK. If you are interested in discussing the viability of an employee share scheme, please contact partners@rjp.co.uk