Giving shares to employees can be a great way to reward and incentivise your staff. It can strengthen staff commitment to the success of the company, and can also be a great way to not only attract and retain key talent, but to aid in succession planning. Employment law experts Darwin Gray share their thoughts.
It is not however something that should be done lightly, and you should ensure that employee-ownership has been properly considered before any shares are granted, in order to avoid any hidden tax or other pitfalls.
These are our top tips on what to consider before granting any shares to employees.
There are many different ways to structure the way in which you give shares to employees. The right structure for you will depend on a number of factors, such as the number of employees you expect to include, whether you will transfer existing shares or allot new shares in the company, whether the employees will pay for the shares (and if so, at what price).
There is a lot to consider here, and our advice is to have an initial consultation with your accountant as they will be able to advise on which structure will be most tax-efficient for you. There are tax-efficient options, such as EMI schemes, and your accountant will be able to advise if that approach is suitable for your business.
2. Formal or informal share scheme?
You can either implement a formal share scheme (such as an EMI scheme, mentioned above), or take a more informal approach. This will largely be driven by the size of your company and how many employees you expect to give shares to. It may also be influenced by tax considerations.
3. When will employees receive the shares?
Regardless of whether you opt for a formal or informal scheme, you will need to give additional thought to when the employees will receive their shares. Typically employees would receive share options in the first instance, which will enable to them to later acquire the shares at a certain point in the future. These “trigger events” are usually either:
i. A “time” requirement – i.e. the employee must be employed in the business for 2 years before they can exercise their option to acquire the shares
ii. A “performance” requirement – i.e. the employee will only be entitled to the shares if they meet certain performance criteria. Any such criteria should be drafted clearly so both parties know whether or not it has been fulfilled to minimise the risk for dispute. For example, vague criteria such as “increase sales” should be avoided, and more specific targets such as “sign up 50 new customers by X date” should be adopted.
iii. A combination of time + performance criteria
iv. An exit-only criteria – this will enable the employees to get shares on the sale of the company. This approach would be suitable where the business has a clear exit strategy within the foreseeable future.
4. Rights and restrictions on the shares
It is very important to consider what rights you want your employee shares to have – and importantly what restrictions you want to put in place. For example, do you want employee shareholders to hold voting rights in addition to rights to dividends? What will happen if the employee leaves the business? Most businesses want to ensure that employees will have to transfer their shares back to the business if they leave. Consideration should be given to what the sale price should be in those circumstances.
These rights and restrictions will either be set out in the rules of a formal share scheme, or in the company’s articles and/or a shareholders’ agreement for more informal schemes.
5. Existing corporate governance
It is important that your existing corporate governance documents (such as your articles of association and shareholders’ agreement) and other relevant documents (such as any investment agreement you have with existing investors) are reviewed to see if there are any restrictions on the company’s ability to implement a share scheme and/or allot shares in the company. You may require specific approval from certain shareholders or other investors before you will be able to allot any new shares (or share options). It is important therefore to understand your position at the outset.