Should your business be giving equity to employees as incentives?
Share options have become popular with start-up and small businesses, but is it the right way to attract new staff and reward existing employees? There’s often confusion surrounding what exactly share options are, and whether they benefit a business or not.
However, for SMEs and start-up companies, equity can be the perfect way to work with directors or key employees, all the while giving the company the chance to preserve cash reserves.
Other kinds of incentives
It’s always worth looking at all the incentives available before deciding to use share options. While there’s no doubt that offering staff a share in your business is likely to attract and retain members of staff, there are other ways to reward people without giving a part of your business away.
It’s always a good idea to retain as much of your company equity as you can. So, if you can feasibly offer different kinds of bonuses, that could be worth considering. An example of this would be commission based cash bonuses for sales staff.
Other alternative rewards and incentives include offering free lunches, company wide social events on a regular basis, offering flexitime or making donations to employees’ choice of charities.
How you can offer equity to your employees
There are two ways to offer equity to staff, if that is the route you choose:
- You can transfer or issue shares to an individual employee, or
- Grant share options.
Transferring shares means that employee becomes the legal owner of a piece of your company. They must be listed as shareholders on your register and, depending on the class of share they are awarded, could be entitled to certain rights. These can include dividends from future (or historic) profits, some rights on voting and some of the proceeds should be business or its shares be sold. Granting of shares can also mean a tax for the employee.
Granting share options, however, means establishing a scheme. This scheme would mean that the option holder has the right (but not the obligation) to buy a certain number of shares at a certain price some time in the future. The option holder, therefore, is not automatically a shareholder in your company but they could be one of they choose to do so.
About share option schemes
Taking a broad view, there are two main kinds of share option schemes that are usually used in SMEs:
- Enterprise Management Incentive (EMI) schemes
These are schemes that can work well for individual option holders, and for the company. They are more beneficial particularly in terms of tax for both parties and should generally be the first choice for new or growing companies.
You will need to check whether EMI options are open to your business and that the employees you would like to become option holders come up the HMRC criteria for approval.
- Unapproved Share Option schemes
This is an option without tax favoured status and is simpler to administer.
How to decide
When deciding which share option to go with, it’s worth thinking about the following:
- Value of options or shares – this is decided by the company but is still subject to HMRC (HM Revenues and Customs) checks on whether NIC and income tax is being avoided.
- Flexibility of options – what happens if the employee option holder leaves or is fired? Whether the leaving terms are good or bad, you need to consider what will happen to the share options under those circumstances
- The timing of ownership – when should staff be able to own the shares and what conditions should be attached?
Whatever you decide, if you do go for it with sharing equity, you must lay out the terms thoroughly. If you don’t document the details of leaver provisions or details of ownership, then it could make things tricky in the future.
