Your share plan – get the first step right
We recently published an outline checklist for putting in place an employee share plan.
Step one on that checklist is producing a blueprint for the design of the employee share plan. This is important not just to get the design of the employee share plan right in the first place, but also to make sure that in the future you have a good record of what you intended the employee share plan to do. All too often, the original intentions behind the employee share plan are lost in the mists of time – and sometimes, if the person in charge of establishing the employee share scheme has moved on from the business, the details sometimes go with them.
Here are some key points for your blueprint:
- Key objectives of the employee share plan, eg
- to help drive the company towards a sale – exit only options
- to provide a sense of ownership for employees – share acquisition/trust
- succession planning
- Participants, eg
- All employees
- Key employees (what is basis of selection?)
- Shares to be used, eg
- Existing ordinary shares – dividends + votes
- New class of employee shares – different rights
- When will shares be acquired
- Time based / performance based (“vesting” conditions)
- Only if the company is sold
- How much will shares cost?
- Nothing? – unless a Share Incentive Plan (SIP) is used, there will usually be tax consequences for employees
- Full market value? – if so, how will employees pay this?
- Will / can a valuation be agreed with HMRC (under a tax advantaged plan)
- How many shares?
- Maximum dilution acceptable to existing owners/investors
- Limits set out in shareholders’ agreement
- Has equity modelling been carried out?
- What happens if employees leave?
- Lose / retain options
- Forfeit shares/sell shares back (to company/trust
- Retain shareholdings (careful consideration required)
- What good/bad leaver provisions will apply?
- Plan selected, and reasoning
- Enterprise Management Incentive (EMI) – flexible tax efficient option plan, key employees
- Share Incentive Plan (SIP) – tax efficient share plan for all employees, resulting in long term ownership
- Company Share Option Plan (CSOP) – tax efficient option plan, selected employees – if company does not qualify for EMI
- Other – where tax advantaged plans are not available
- Employee Ownership Trust (EOT) – for succession / employee owned business
- Will there be any changes required to company’s constitutional documents?
- Changes to articles of association, eg to ensure transfer provisions for employee shareholders who cease employment
- Creation of new class of shares for use under plan
- What consents will be required eg under articles of association or any shareholders’ agreements?
All of these questions will need careful consideration before the employee share plan is established. RM2 can help you work through the details to identify the answers most appropriate for your company, your employees and your shareholders, including taking into account best practice from an HMRC perspective.
For more information contact one of our advisers for a free consultation on 0208 949 5522 or by email firstname.lastname@example.org.