28th January 2020

A guide to share structures and getting the balance right.

Many startups and scale-ups face a double-bind when it comes to hiring. They can’t compete on cushy benefits and big salaries but attracting the best talent is critical to their growth.

While corporate-level salaries aren’t an option, there are other ways for early-stage businesses to offer value to employees. Share schemes, in particular, are a powerful option. This incentive not only supplements pay but also gives employees a stake and an incentive to help the business flourish.

The difference between shares and share options

There’s an important distinction between shares and share options. When you issue shares the formula is pretty simple: Issue ten shares to employee X and, right away, they own ten shares in the company.

Usually, you’d issue shares in return for something (say, investment). In other words, it’s less applicable to employees. What’s more common in early-stage businesses is to offer employees options.

Stock options mean the employee doesn’t receive the shares immediately. Instead, they get the right to buy shares at a predefined price in the future, or what’s commonly called the ‘strike price’. If you issue 100 options at £10 per share, for example, the employee can buy these shares down the line for £10, even if the value of the company increases.

Get the timing right

Many companies now institute what’s called a vesting period. This is how long employees must wait a certain amount of time before they can exercise their options. You can build other provisions into this agreement, too: if, for instance, the employee leaves after six months, they won’t receive any equity.

Another timing-related consideration is to do with tax. If you issue shares or options incorrectly you might land your employee and your company with a big tax bill.

If you’re pre-revenue and pre-funding, your shares aren’t recognized as having a value in the eyes of HMRC. Things change, however, as soon as you start raising funding or generating substantial revenues.

Once your shares have a ‘value’ they are deemed as a taxable benefit by HMRC. Any shares allocated past this point are subject to immediate taxation. The tax authority does offer another route for companies with assets of £30m or less.

If applicable, a business can offer Enterprise Management Incentives (EMIs). Under an EMI, you can grant share options up to the value of £250,000 to an employee within a three-year period.

The employee won’t have to pay Income Tax or National Insurance if they buy the shares for at least the market value. If you give a discount on the market value, the employee must pay Income Tax or National Insurance on the difference between what they pay and what the shares were worth.

Shares aren’t an endless resource

Company equity is a precious commodity. As such, it needs to be given out carefully. It can be a wonderful way to attract and retain talent to your business or get investment, but it’s possible to give away too much.

If you’re careless, there’ll be none left for future investors or employees -- and you’ll lose a powerful weapon in your arsenal. A company owner needs to consider how much control they want to give away.

Plotting out the right structure, split, and vesting schedule can be tricky to do by yourself. That’s where expert advice can truly make a difference, helping to maintain the incentive’s value during your business’s most critical first steps and beyond.

Our expert advice can help make sense of it all, even when you begin to take on equity investment.

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