RM2 experience: share schemes in private companies

Posted by RM2 at 15:47 on 25 Feb 2015


RM2 has been designing, implementing and administering share schemes for private companies for over 15 years. We have advised on upwards of 750 schemes established for companies in private ownership.

From this, you can be sure that we have a good idea of the questions that private company owners often ask about employee share plans, and the issues that worry them. Here are a few:

What's the point of a share plan in a private company?

It's obvious that – unlike shares in a listed company – it's not so easy for shares to be bought and sold where the company is unlisted.

However, private companies will often link ownership of shares to a specific event such as a sale of the business, when employee shareholders can sell alongside existing shareholders for value. This is frequently done by way of an "exit only" option plan whereby employees exercise options and acquire shares only if a particular event occurs.

Alternatively, employee shareholders can receive dividends on their shares in the same way as any other shareholder.

In some cases, it may be appropriate to set up an internal market for shares using an Employee Benefit Trust, so that employees can actually buy and sell shares without the shares leaving the company. Existing shareholders, or even the company itself, can also buy shares from employees – subject to funds being in place.

More generally, the principle behind employee share ownership is that it incentivises and motivates employees to think and act like owners, potentially resulting in increased productivity. Linking share ownership to a corporate event in the future can help tie employees in over the long term; and using performance conditions can help drive employees towards the achievement of certain individual or corporate goals.

How do I value shares in a private company?

Fundamentally, shares are worth whatever a willing buyer and seller agree between them.

For the purposes of employee share schemes, it is usually possible to agree a "tax value" with HM Revenue & Customs for shares to be awarded to employees. We have considerable experience in agreeing such valuations. Amongst other things, HMRC will usually take into consideration the last three years' financial records, the value of recent transactions, any recent acquisitions activity among similar companies, and a consideration of the current markets.

How can I keep control over my company?

Putting in a share plan doesn't mean relinquishing control of your business. It's common for private companies to use 10% or less of the share capital, ensuring majority voting rights remain with the existing shareholders. Using exit only options will mean employees never become shareholders until an exit is about to occur, so control never becomes an issue.

It's also possible to use non-voting shares for many share ownership arrangements.

What happens if my employees leave?

It is usual for option arrangements to ensure that share options will lapse if employees cease employment. Similarly, if employees actually own shares, it is standard practice to include leaver provisions in the company's articles of association, to make sure they must sell their shares back if they leave. You can adjust the price paid for their shares according to the reason for leaving.

Can I involve non-employees?

Yes, but the government recognised tax advantaged schemes such as EMI, CSOP, SAYE and SIP may not apply. Alternative arrangements can be used, such as DSPP, which can sometimes deliver tax advantages.

How much does it cost?

This will depend on the type of scheme used, the number of employees, the company structure and how complicated you would like your plan to be. We offer a free consultation to discuss your outline requirements and can then provide an estimate for the likely costs to design and put in place a share plan.

If you would like to speak to one of our specialists regarding any of the points covered in this article, call us on 020 8949 5522, or email us via enquiries@rm2.co.uk.