Getting your share plan right - how much is too much?

Posted by RM2 at 11:51 on 20 Apr 2018

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We’ve published a helpful checklist to set out some key steps to getting your share plan right.

Step 1 - It's all about planning (see our previous blog "Your share plan - get the first step right").

Step 2 - Working how much to give away under your share plan or option scheme.

There’s no right answer to this – particularly for private companies, you’re not tied up by any investor guidelines that might apply to a listed company.

Still, there are some points that you may need to consider, and some helpful “rules of thumb” that might help you decide how much is too much, or too little:

  • Check your articles of association: you might need a shareholders’ resolution to give the directors authority to give out shares when share options are exercised. If an authority already exists, it may have a time limit on it, or a limit on the number of shares that can be allotted to employees under an employees’ share scheme.
  • If you have one, check your shareholders agreement, or any similar agreement with outside investors. It may contain limits on the number of share options that you can grant, often by referring to a percentage of the share capital, or a “share option pool”. Sometimes you might need additional shareholder approval if you want to go over that percentage.
  • Remember the basic rule of thumb: setting aside 10% of the share capital for all employees is a standard approach. A very key hire in a small private company might be granted around 2% or even 3%. But the exact percentages will depend on your own requirements, you can be as flexible as you like with your offering.
  • Think about the “endgame”. If your option plan is only going to deliver reward when the company is sold, work out the numbers backwards. Identify the current value of the company, estimate your hoped for sale value, and work out what percentage of the share capital is likely to deliver an appropriate reward for each employee. Of course there’s no guarantee of these ultimate numbers but it will give you a good starting point for calculating awards.
  • Remember – you may have new joiners, so set aside some leeway for future share awards or option grants. Equally, you will almost certainly have leavers - if their options or awards are forfeited when they cease employment (which is advisable), you can effectively “recycle” those shares and make new awards under your share scheme.

If you need more detailed guidance on how much to give your employees under a share plan, contact us on 0208 949 5522 or by email on enquiries@rm2.co.uk. We’ll be happy to discuss your particular situation and provide you with assistance on equity modelling if required.