Call of Equity: Modern Welfare

Posted by admin at 15:51 on 13 Feb 2017

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The UK boasts a substantial and highly intellectual talent pool, a selection of the best video game studios globally, technical as well as creative brilliance, and an on-going aptitude to produce original titles that sell worldwide. Britain’s video game industry currently employs over 9,000 highly talented development personnel. Over 75% of the workforce in UK game studios such as Climax, Jagex, Kuju Entertainment, Rebellion and Ubisoft Reflections are qualified to degree level or higher (Statistics taken from TIGA.)

The latest news of the proposed tax break for the UK video games industry is indicative the future is bright. Whilst the proposal is expected to go through (post a probe from the European Union), the initial delay is a frustrating one.

In the short term, this postponement will lead to the continuation of some of the same problems faced by the UK industry, especially in relation to staff retention. We have previously explored this in our earlier blog ‘Retain top talent or it's GAME OVER’. However, will the introduction of the tax break resolve this issue, or could it add new complexities?

Naturally, favourably tax legislation will encourage start-ups and could promote an influx of companies, particularly in the smart device video game market, to set up in the UK. This will inevitably make job transitioning a much less risky option for talented employees. The tax breaks already in place abroad saw some companies choosing to relocate to France and Canada. If the expected legislation comes to fruition, companies may find it better to remain or become headquartered in the UK. So how should such companies attract and retain the talented individuals so vital to their continued success?

What are the options available?

The first step for employers should be to assess their long-term offering to ensure it is competitive, reflects current commercial targets and has been effectively communicated to maximise employee engagement. Those who have not yet implemented an equity plan should consider doing so.

Enterprise Management Incentives (EMIs) are a popular employee share option choice in the tech sector, being both flexible and very tax efficient, to help attract and retain skilled developers and senior management. EMIs are structured as an option scheme, whereby an employee is granted the right to purchase company shares in the future at a price set at the date of grant. The employee benefits financially when the company achieves a liquidity event and the value of the shares rises above the purchase price.

Where developers are engaged not as employees but as contractors, they cannot participate in an EMI plan. An Unapproved Share Option Plan (USOP) might however be a welcome solution to the FD's challenge of funding contractor day rate charges. Perhaps an overall remuneration package for contractors comprising lower daily pay, topped up with an equity award, might be negotiated? This could help perserve vital cashflow funds in the business - essential during stealth developmental phases before a product generates commerical revenues.

Whilst a USOP is not tax-optimised, it is extremely flexible, can facilitate equity awards to non-employees and staff in overseas territories and can mitigate cash-burn (something that should appeal to a company's investors). And if you are wondering about how to provide equity to your Non-Executive Director then look no further than a Deferred Share Purchase Plan (DSPP)!

For more information on the content covered in this article, contact RM2 directly on 020 8949 5522, or email Liz.Hunter@rm2.co.uk.