Share Option Schemes for Small Companies
A share option is the right to buy a certain number of shares at a fixed price, sometime in the future, in a company. Traditionally, such employee share options were associated with large quoted companies. However, relatively recent changes in legislation have made these schemes attractive to smaller businesses and can give them a significant competitive advantage.
The main benefits a share option scheme can offer a company are as follows:
• Better motivated employees, with their interests aligned with shareholders, adding greater value to the business.
• An added incentive to help recruit potential employees.
• The scheme will help retain the company’s best employees.
• HMRC approved schemes are tax efficient.
• Owners retain exclusive rights to dividend payments and voting (control).
• The scheme can provide the promise of a valuable benefit, but defer the cost to the future.
• The share options are only exercised if the pre-determined conditions are met and after a certain length of time.
There is no need for the employees to exercise their options unless they can sell them right away – e.g. if the company itself is being sold. That means that owners don’t need to worry about giving away control of their company until they want to sell the company themselves. If you own a small company and would like to set up a share option scheme, contact one of our commercial firms near you.
The common HMRC approved share option scheme is known as the Enterprise Management Incentives Plan (EMI). EMI share options can be written to include handcuffs, for example stating that the options will lapse if the employee leaves the company within a certain time frame.
EMI is also a very tax-efficient share option arrangement for employer and employee alike because there is:
• No tax on grant.
• No income tax or National Insurance (NI) on exercise (as long as the company meets certain conditions).
• Capital gains tax (CGT) payable on the increase in value of shares when they are sold. CGT is currently payable at 18%, much lower than the rate of income tax and NI, especially considering the new 50% income tax rate introduced for the very highest earners in April 2010.
What are the barriers to using EMI options?
Granting EMI share options can be expensive. A tailored EMI option agreement can easily cost upwards of £3,500 plus VAT.
Follett Stock’s EMI for start-ups
Follett Sotck can offer an EMI product aimed at start up and smaller companies who may struggle to pay this level of legal fees.
We will provide you with a basic EMI agreement together with ancillary documentation for one key employee for a total of £999 plus VAT.
Article by Jonathan Lea, Associate at Follett Stock LLP
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