Many businesses have recently imposed pay freezes on their staff or have otherwise restricted employee benefits.
Share options can be extremely advantageous and provide many commercial benefits to both employers and employees.
One of the key advantages of a share option scheme for an employer is that it can incentivise an employee without any cash flow implications of increasing salaries or awarding monetary bonuses related to performance. The main advantage to the employee is that a share option gives the employee a right to subscribe for shares in the company at a pre-determined price and there are no obligations imposed on the employee to subscribe for these shares.
Consequently, the employee does not have any financial risk because if the market value of the shares falls below the price which the employee must pay on exercise of the option, then the employee can decide not to exercise the option. However, if the company increases in value over the exercise price after the grant of the option, the employee may then choose to buy the shares and consequently make a profit if the company is then sold.
Broadly any type of ordinary shares can be offered as long as they are fully paid up and not redeemable
Incentivised
The employee also feels suitably incentivised because he feels he has an ownership in the company and is working towards its growth.
An employer can impose certain performance criteria before the options can be exercised. This gives an employer further protection to work towards certain financial goals in order for the options to vest and for the employee to be in a position to exercise the options.
There are also numerous tax advantages to share option schemes. The Enterprise Management Incentive Scheme (EMI) is a popular scheme used by employers provided that the businesses are eligible and meet the statutory criteria.
Key features of EMI schemes include:
- Taxed advantaged options over shares worth up to £120,000 may be offered to any qualifying employee of a qualifying company, subject to a maximum share value of £3,000,000
- Qualifying employees must work at least 25 hours per week (or 75% of working time if less) and be interested in no more than 30% of the equity (not including the shares subject to the option itself)
- The company must be independent, have gross assets of not more than £30million and employ fewer than 250 people
- Broadly any type of ordinary shares can be offered as long as they are fully paid up and not redeemable
- The employer can impose performance and loyalty conditions
- The fair value of the shares at the date of grant is normally agreed with HMRC shares and assets valuation. However, the exercise price can be set below this level (or at nil, subject to certain conditions)
- There is no income tax or national insurance (employer or employee) on the grant of the option and none on exercise, except in respect of any discount of exercise price to fair market value at the date of grant. On sale of the shares acquired through the option, capital gains tax is payable
- Options must be capable of exercise within 10 years of grant. There is no minimum exercise period
- There is no need to obtain prior revenue approval before establishing a scheme. However, it must be registered with the Small Company Enterprise Centre (part of HMRC), within 92 days of the option grant;
- Most business activities are eligible, with certain exceptions including dealing in commodities or securities, financial activities, legal and accounting services, property development, ship building, coal and steel production, hotels and nursing homes.
Businesses who are hoping to grow in the next few years and who may have a restricted cash resource should certainly consider setting up share option schemes in order to retain key staff and significantly increase the value of the company.
