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Employee Share Schemes for Startup Businesses

Wednesday 11 September 2013

Start-ups often have little immediate revenue and can struggle to attract the sort of talent needed to get their business off the ground. Employee share schemes can provide an alternative or an addition to a salary as a way of attracting and rewarding key employees.

Employees working for a company where they have a direct share in businesses performance are more likely to more motivated and loyal than a salaried worker. Some research even shows that businesses operating employee share schemes are more productive. Schemes can also be cost and tax effective.

The Downside of Employee Share Schemes

There are of course a number of disadvantages for start-up business that choose to adopt employee share schemes. They can dilute the equity of the company and it is often difficult to value the potential of a start up. The amount of equity to give away is, therefore, a difficult decision as the value of the company may change dramatically in the future.

If a founder gives away too much equity early on then they may also have control issues later or find it more difficult to attract outside investors. It should be noted that setting up an employee share scheme is also likely to entail legal and administration costs.

Tax Advantages of Approved Employee Share Schemes

There a number of employee share schemes approved by the government which offer tax advantages including Enterprise Management Incentives (EMI), Save as You Earn (SAYE) and Share Incentive Plans (SIP). However, not all of these are suited to small start-up companies whose shares are unlikely to be traded on a listed exchange in the near future.

The most appropriate of the government approved schemes for smaller companies are Enterprise Management Incentives (EMI). EMIs are specifically aimed at smaller companies of less than 250 employees or £30m in assets. These schemes are discretionary meaning that business owners can offer them to individual employees as they see fit. It should be noted that certain types of businesses are excluded from offering such schemes including banks and investment businesses.

Through an EMI, employees may receive up to £250,000 in share options without incurring income tax or national insurance on the value of their options. Capital gains tax may be payable upon the exercise of the options if the shares are then sold. Other detailed provisions apply in relation to the company, the employees the shares and the options over those shares; for example employees that hold more than 30% of existing shares cannot participate in EMI schemes.

Comment

Businesses can of course set up their own employee share schemes but they will not enjoy the same tax advantages as government approved schemes such as EMI.

Startup owners should make sure they take appropriate legal advice and that they are not giving away too much of the equity in their company. Employees should make sure they understand the risks they are exposed to; small start-up companies are inherently risky and lack of liquidity means the shares can be difficult to sell.

For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.