How to Design an Employee Share Scheme

What is an Employee Share Scheme?

Simply put, an employee share scheme shares company ownership with your team. It lets you reward key people with equity, or even all your employees – that’s all up to you.

It also allows for the distribution of shares to non-employees like consultants and advisors, but it’s sometimes best to operate different types of schemes for internal and external people.

Deciding who to give equity to is just the beginning. The real challenge is identifying the right type of scheme best suited for your needs. We have at least ten methods of distributing equity, and each one comes with its own set of pros and cons.

So, before we dive into the details, let’s tackle an important question: Why would you want to give anybody shares in your business?

Why Launch an Employee Share Scheme?

Here are six compelling reasons to embark on this journey:

1. Attract Top Talent: Equity offerings help bring in high-performing individuals into your business.
2. Retain the Best: Sharing ownership enhances employee loyalty, reducing turnover rates.
3. Boost Productivity and Performance: Employees who are also shareholders work harder, leading to increased output and revenue.
4. Improve Employee Engagement: The more employees feel included in your business mission and success, the more motivated they’ll be to contribute.
5. Ease Cashflow Pressure: You can opt to incentivise your team with equity rather than depleting cash reserves to pay top rates and large bonuses.
6. Increase Overall Business Value: A stronger and happier team ultimately boosts your business value.

Now that we’ve established the advantages, let’s delve into the specific types of share schemes that best match different business scenarios.

Scheme Types: Shares or Options

If you’ve decided to proceed with an employee share scheme, do note there are two distinct ways of sharing ownership: shares and options, and each one is further broken down to different schemes.

1. Real Shares: These are actual shares your team holds in your business. Ordinary real shares are just like ordinary shares but are issued at a ‘hurdle price’ that represents a small premium to the company’s current value. Growth shares only participate in the business’ growth in value from that point onward.
2. Options: These allow recipients to buy shares at a later date, at a fixed price. Enterprise Management Incentives (EMIs) are an excellent way for this if you want a tax-efficient share scheme for employees.

Tax Implications: Are Share Schemes Tax-Free?

No, there’s always going to be a tax payable, although you can avoid paying the maximum Capital Gains Tax (CGT) rate. EMIs have extremely tax-friendly advantages, which makes them fantastic incentives, especially when compared to the standard tax amount on an annual bonus.

Take note: In the UK, taxes may be due in three scenarios:

1. On the award
2. On exercise
3. On the sale

Here are the two common taxable amounts:

1. Capital Gains Tax (CGT): Anywhere from 10–20% is due on the sale of the shares, applied to the increase in the value of your shares from the point they were given. If you qualify for Business Asset Disposal Relief (formerly Entrepreneur’s Relief), it’s 10% CGT.
2. Income Tax: This is usually charged between 20–45%, due at the point that the option is exercised or, in some cases, on sale.

Designing Your Scheme: Questions to Ask

Before designing your scheme, determine your motivations for offering people equity. Answering the following can help shape your approach:

1. Would you prefer giving people shares now or have them buy them in the future?
2. Do you plan to give shares to employees, non-employees, or both?
3. Do you want certain performance milestones reached before releasing equity?
4. What’s your plan if people leave the business?
5. How big is your business in terms of team size and asset value?

Your answers will help you pinpoint your business needs and identify the type of scheme most beneficial to you.

Vestd’s Recommendation: Agile Partnerships™

We recommended Agile Partnerships™, a system devised by Vestd and designed to offer founders with the utmost flexibility at any stage of their company’s journey. It helps startup founders share ownership with key players in a manner that is fair and protects the business (and all shareholders).

In conclusion, share schemes are a powerful tool for motivating and incentivising your team. For a more in-depth discussion, access a trove of resources by signing up to Genie AI, your AI Legal Assistant for Drafting, Reviewing, Negotiating, and signing Legal agreements.

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