Equity schemes offer ways to engage – and retain – employees, suggests Lynn Wilson
Attracting and retaining key employees is an essential part of growing a successful business and can often prove a challenging area for entrepreneurial companies.
This was featured at the Engage Invest Exploit conference in Edinburgh in April which highlighted that providing employees with an equity interest is usually the most effective method of achieving this.
A popular model for providing share-based incentives are enterprise management incentives (EMI), an HMRC-approved, flexible share option plan aimed at helping smaller independent companies recruit and retain high calibre employees who are key to the future success of the company.
EMI is a method of rewarding employees for taking a risk by investing their time and skills to aid the company’s growth, while allowing them to participate in the growth which they have helped to generate.
An “exit only” EMI can be adopted where the exercise of options is conditional only on a pre-determined exit event – ie the sale of company.
This can be beneficial for companies as it allows for minority shareholders to be kept to a minimum and while the employees are option holders there is no requirement for them to be party to shareholder decisions. There is no Income Tax or National Insurance on the grant or exercise of the options assuming the exercise price is not less than market value at grant.
A further benefit of an EMI is that Entrepreneurs’ Relief is available on the disposal of the option shares provided these were granted 12 months prior to a disposal.
There is no 5 per cent shareholding or voting requirement for shares acquired via an EMI.
A company may not meet the conditions required to issue EMI options, therefore other tax advantaged incentives have become popular as some businesses have struggled to achieve their desired level of growth and provide shareholder value.
The good news is, alternatives do exist with an increased focus on the use of growth shares. Generally, a growth share plan involves the creation of a new class of shares which do not participate in the existing value of the company, preserving this for the existing shareholders.
The right to participate on an exit will be linked to the performance of the company and typically only kick in once certain pre-determined hurdles are achieved.
Due to the restrictions placed on the class of shares, growth shares typically have a low value when they are awarded, making these affordable with minimal Income Tax and National Insurance implications.
Growth shares are a specialised area and complex valuation methods are often necessary, consequently expert advice is essential.
Lynn Wilson is a senior manager in the specialist expertise to entrepreneurs (E2) team at Anderson Anderson & Brown
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