Enterprise Management Incentive implementation – should a company consider commercial matters at the “off”?
So, you think that you might want an Enterprise Management Incentive share option scheme (EMI)? Well, there are a couple of other commercial issues that you may wish to consider even at this very early stage in the EMI implementation process.
What size of option pool do I use?
On the matter of equity participation, most companies would not subject more than 10%-15% of their post diluted share capital to share options. This is a parameter that listed companies follow. That said, RM2 do have a small number of clients who are not listed who have option pools approaching 50%.
You will also need to think about retaining sufficient headroom for anyone senior that you may need to recruit in the future that you would want to take part in the plan.
What value do I want to give to participants?
There is also a question as to what value you would wish to deliver to participants in the EMI plan. A good starting point would be to look at the annual salaries paid to the participants. Many companies look to deliver value of between 1 and 1.5 times an employee’s annual salary
Are you considering an “Exit-only” plan with a view to an Exit event (for instance a sale of the company or a flotation) within the next 3-5 years? If so, great – this can be very effective for aligning interests of owners and employees. It also introduces simplicity (and hence reduced cost) in relation to the implementation process itself. If not, you will need to consider whether the company/current shareholders are going to be comfortable with the notion of employee shareholders. It also then becomes necessary to manage/deal with any concern over keeping control of the company’s share capital (for instance if the employee leaves the company on a sour note).
Which performance conditions should I use?
You may have been considering performance conditions (particularly where not considering an “Exit-only” plan). RM2 generally advise keeping matters simple particularly in relation to performance conditions and in relation to leaver provisions.
Avoid a potential “negotiation” with potential participants
RM2 would also counsel against giving too much specific information (e.g., promises on award amounts/detailed leaver provisions) to the potential participants until the scheme has actually been set up (other than saying that the Company is in the process of setting up an EMI Plan). Otherwise, the Company could end up being embroiled in a “negotiation” with the potential participants. RM2’s view is that the company in this instance is clearly doing something that is indisputably for the benefit of the participants, It should not be “held hostage” by potential participants in this regard.
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