Why the UK tech sector favours share plans

Posted by RM2 at 15:51 on 30 Jan 2014


Share options have always been an industry standard component of pay in the tech sector. Many tech-based companies use employee share plans to help secure and support the growth of their business. Using data captured from April 2012/13, we can reveal 28% of all share plans The RM2 Partnership Ltd established were for companies in the tech sector, and commonly for software developers.

What is a share plan?

Share plans are used by companies to offer equity-related rewards to employees, non-executives, and contractors. Enabling staff to obtain shares in their employing company can generate the feeling of ownership and ultimately promote both loyalty and engagement. Such arrangements also help to align the team's objectives with those of the existing shareholders, driving growth, and increasing overall share value and typically focusing behaviour towards attaining a successful exit event (usually a sale or flotation of the company at a price and time that satisfies or exceeds any external investor expectations.

The most popular share plan in the tech sector is currently the Enterprise Management Incentive (EMI). The EMI is a tax-advantaged discretionary share option plan designed to help growing companies attract and retain members of staff who possess the skill-set to help a company develop and succeed. It should be noted that an EMI is only suitable for employees who meet a working time criteria. Contractors would typically be rewarded under an Unapproved Share Option Plan (USOP), whereas NEDs and other senior consultants might participate in a Deferred Share Purchase Plan (DSPP).

Under an EMI, employees selected to participate are granted an option to buy shares in their company, paying a fixed price if they decide to buy the shares (this is known as 'exercising the option'.) Often the price will be the value of the shares when the EMI option is granted. There is no obligation to exercise the option, so if the share price doesn't rise employees would be unlikely to exercise. Typically the vesting terms (i.e. the triggers for when an employee can exercise) will be core. A typical tech vesting schedule would be over 4 years, but bespoke conditions are possible. Exercise price and/or number of shares may also vary. Our equity modelling service can be very useful in determining the appropriate levels of award. It is possible for different employees to have different option conditions.

What's the appeal?

Implementing a share plan can allow your company to:

Attract the best staff: Having an equity awards system in place can be extremely attractive, particularly when the company is perceived as having strong growth prospects. This additional benefit helps attract key industry players to the company as it allows them to participate in the future enterprise value. Having an employee share plan demonstrates that you are keen to engage employees in adding value and this can really help not just in attracting talent, but also in attracting investors. Whilst the company is in stealth phase and boot-strapped a share plan allows the offer of "sweat equity" to early hires at a time when the business could not otherwise remunerate the individuals sufficiently via cash pay.

Motivate employees for the long term: Providing ownership rights to your employees will often mean people start thinking and feeling differently about the business. As previously stated, their interests become aligned with those of the existing shareholders as they are further incentivised to drive the company forward and increase share value. Enhanced engagement helps to produce a shared vision of the future, this can lead to a more dynamic and efficient working environment.

Retain your key employees and safeguard the future of your company: For many tech sector companies, individuals are the key to success. This makes staff retention of critical importance. Time-based and/or other performance conditions can often be attached to awards; ensuring key personnel stay with the company and achieve the longer-term objectives. A typical tech company vesting schedule would be over four years with a one year cliff. You can design the plan to deal with leavers as you wish. Early hires leaving in amicable circumstances might be entitled to retain vested options, but lose any award that has not yet vested. Later hires, who may then have an increased level of cash pay, may lose all equity rights if they leave. Part of our plan design service is to discuss such matters with you, so that the treatment fits your needs, ethos and culture.

Reward those who have helped grow your business: Why use a share scheme instead of more traditional cash bonuses? Share plans can provide significant tax advantages and benefit cash flow. Performance conditions put in place can help ensure growth is heading in the right direction, sustainably, overtime, and not just short-term. Under an EMI, employees gain when shares can be sold for a profit. In most circumstances, £11,000 of gain will be tax-free (i.e. using the annual Capital Gains Tax exemption 2014/15 allowance shown), and any excess gain should only suffer tax at 10% (following tax law changes introduced in 2013). This compares very favourably with a 60.8% tax charge (45% Income Tax, 13.8% employer National Insurance Contributions, and 2% employee National Insurance Contributions) levied on cash bonus and salary payments.

Manage cash-flow: A share plan can help you manage your cash-flow by allowing you to reward employees without constantly having to dip into your company's financial reserves to pay cash bonuses, which could also incur a significantly higher tax charge. Naturally, anything that conserves precious investor funds will be welcomed by a company's FD.

Case study

Gold-i Ltd are a successful software development company that opted to set up an EMI Share Plan in 2010, to award 4 key employees. The Company has recently increased participation in the plan to 13.

When asked what the main driving force behind the decision to implement a share plan was, Tom Higgins, Gold-i CEO stated "I want my employees to be fully-engaged with the business and to benefit in the long-term growth of the Company. An EMI share plan is a very efficient way of doing this."

Tom also added "We have excellent staff retention and I think the EMI Share Plan helps with this."

For more information on how a share plan can support and enhance your company's development, contact RM2 directly on 020 8949 5522, or via enquiries@rm2.co.uk.