Share Options are a brilliant method to have employees more involved with the success of the business while also being a good incentive for them to reach professional goals.
Option 1 – Bonus Scheme
Method
This is a contractual bonus scheme arrangement for the employees to share in the delivery of the future success of the business. This can be entirely discretionary but also contain some targets for the employees to achieve so they, and you, have some way of measuring performance now, and in the future.
Summary
This is the most straightforward and cheapest to implement of the three options.
Option 2 – Issue of shares – specifically growth shares
Method
This involves creating new shares to issue to the employees. Normally the employees would pay tax, and your company would suffer employers NICs, on the deemed or actual value of the shares issued to each of the employees.
To avoid the payment of this tax a solution is to create a new class of shares called ‘growth shares’. Growth shares are structured so that they have no value on the day they are issued to the employees. This means that no taxes are due by the employee, or the employer, on their issue.
Summary
This is the most complicated of the options presented but for the right companies it works well where there is a strong desire for the employees to own shares immediately rather than options.
Option 3 – Share Option scheme
Method
This involves creating a share option pool for employees. The benefit of EMI share options is that they are tax free at the point at which they are granted to the employees.
In addition they are also tax free for the employee at the point of exercise provided the exercise price is approved by HMRC and is not set at a discount to the share price at the date of grant.
The exercise price is normally agreed at a notional market value which is usually quite low.
Summary
The benefit of the share option arrangement is that the employee does not actually become a shareholder unless, or until, they exercise the share options. This means there is no need for any shareholders agreement and the share options usually lapse if the employee ceases to be employed by the company. Normally the only triggers to allow the share options to be exercised are on exit or sale of the business.
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