Legal Considerations When Offering Equity to Employees

Employee equity in the UK and beyond is a powerful tool for startups, scale-ups, and growing businesses. By giving your team a genuine stake in the future of your organisation, you are making them fellow investors as well as team members. The world is full of examples of when sharing equity has proven pivotal for entrepreneurial employers and small business owners seeking to scale up.  

Offering shares or options, however, isn’t something to be done on a whim or agreed upon merely with a handshake. Sharing equity requires careful thought and involves balancing multiple legal, financial, and corporate governance factors, often with competing considerations. It needn’t be challenging, though. Our corporate law team is experienced in the process. Although this brief blog shouldn’t be taken as formal advice, we would be delighted to provide more formal guidance should you need it.  For now, however, let’s examine the benefits that equity shares and other startup share schemes offer.

Why Offer Equity to Employees?

Offering equity to employees is a fantastic tool to have in your armoury when it comes to attracting, motivating, and retaining talent within your business. This is especially valuable if you are working within a competitive industry or a fast-growth environment where turnover might otherwise be relatively high. There is nothing better than equity to give your employees a tangible stake in the company’s success. An investment opportunity aligns your staff’s personal goals with the company’s long-term performance, providing a powerful Investment for businesses that may struggle to match market-leading salaries.

Attracting Top Talent

In today’s competitive hiring market, especially within the tech and startup sectors, top candidates often expect equity in place of an immediate high-salary offer. This is common among startups and fast-growth businesses as it signals that you value their contribution and are willing to share the company’s future success, even if the resources don’t quite reach the top of your industry’s salary benchmarks… yet. 

Boosting Retention and Motivation

Equity aligns employee interests with company growth. When your team has a real financial stake in the outcome, they’re more likely to stay long-term and work more effectively while they’re employed. Having the ability to influence your financial future is relatively rare for employees. An employee with Equity is in a better position to see their efforts channelled into future growth and is likely to feel more engaged.  

Different Types of Equity You Can Offer

If you’re offering shares to employees in the UK, there are two main mechanisms you can use to make your offer compliant with regulations: EMI Schemes and Growth shares. While both aim to reward employees with a stake in the business, there are significant legal and tax differences to understand. EMI options, or Enterprise Management Incentives, are government-approved share options designed to help smaller companies – those with less than £30 million in assets and fewer than 250 staff – attract and retain staff with significant tax advantages. EMIs allow employees to purchase shares in the business at a pre-agreed price. If HMRC conditions are met, there is often no income tax or National Insurance to pay when the options are exercised. 

EMI schemes are particularly attractive because they can be tailored with vesting schedules and performance targets, giving businesses flexibility while offering employees a highly tax-efficient benefit. Different jurisdictions have their own versions of the EMI scheme. In Ireland, this is known as the Key Employee Engagement Programme (KEEP), for example.  

Growth shares, on the other hand, typically suit companies that don’t qualify for EMI or equivalents. They form a separate class of shares designed to deliver value only once a company achieves a certain milestone. Unlike EMI schemes, growth shares do not come with specific tax relief. This means that financial advice is often considered alongside any share offer. It is important to ensure employees understand their potential future liabilities before signing anything. 

Ultimately, the right choice of scheme will depend on your company’s eligibility, growth plans, and the goals you want to achieve with your employee incentive strategy. If you’re not sure, it pays to get independent professional advice. 

EMI Schemes Vs Growth Shares 

Legal Documents You Need To Share Equity

Once you decide how to proceed, you’ll need to prepare the legal groundwork for your equity share plan.  Here, paperwork is all-important. As a minimum, you will need to draft two specific documents: a shareholders’ agreement and updated articles of association. These documents form the legal foundation of your equity structure, and all changes require approval by a board resolution. Only then can you make the offer to your employees. Let’s 

Shareholders’ Agreement

You will potentially need to update your business’s shareholder agreement to reflect any new shareholders. The shareholders’ agreement holds the rights and obligations held by all shareholders, including any future equity compensation to which they may be entitled.  Handling change formally through amending the document is crucial, especially for protecting the interests of founders and other early investors as the company grows. 

Articles of Association

The articles of association legally describe how your company operates. The articles define shareholder rights and should establish rules for issuing shares.  Well-drafted articles ensure your equity arrangements are clear, enforceable, and aligned with your business goals, reducing the risk of future disputes. These must often be updated to reflect new share classes, voting rights, and option arrangements when they happen. 

Board Resolutions

Formal approval by the company’s directors, in writing, is required to issue equity in the form of options or shares. They are normally formally minuted at a board meeting to officially confirm if everyone is aware of the changes to how shares are being distributed and nobody has objection to the changes. 

Option Agreements & Grant Letters

Once you are confident that your paperwork is in order, you can communicate your offer of equity to the employees in question. The form of offer needs to be carefully considered as it must specify the terms of any deal. You need to be clear about when employees get to own any shares they’ve been offered. This means including a ‘vesting schedule’ outlining a detailed timeline. Your offer should also explain what happens if an employee exits the company prior to gaining share ownership. 

Tax Considerations Of Equity Share

Although EMI schemes offer major tax savings, employee equity does involve a degree of tax planning for both the business and the employee. Financial planning starts with setting a fair market value for the shares. For an EMI scheme, this needs to be done through a formal HMRC valuation. Rapid growth, however, which is good news, could lead to a significant increase in your share value. Without careful planning, employees could face big income or capital gains tax bills when they realise their gains. This is why we always recommend that employers work with a qualified tax accountant or HR advisor when considering an equity share scheme.  

Common Equity Share Mistakes to Avoid

We have established that share schemes for employees can be a fantastic tool for attracting talented individuals and motivating your team to stick around. This is especially true if you’re in a growth sector or in an entrepreneurial frame of mind. Equity is a great tool to reward people with in the future, if it’s not so easy to do in the here and now. 

However, without careful planning and legal oversight, it’s easy to make mistakes and suffer the consequences down the line.  To protect both your business and your employees, it’s vital to approach equity offers with a strategic, legally compliant plan. In this section, we’ll cover the most common mistakes businesses make when offering equity — and more importantly, how you can avoid them from the start.

Offering Equity Informally

A casual promise to “give you shares” made in a meeting or over coffee can create serious legal obligations down the line should unhappy employees feel let down. Always document offers properly.

Failing to Update Company Registers

As we’ve seen, issuing shares and granting options trigger requirements to update paperwork. You’ll need to update your Companies House filings and postings at other statutory registers.

Poor Communication

A poorly drafted option or grant letter which doesn’t include details such as a vesting schedule or exit details can cause problems over time. It’s essential to maintain open and frank communication with employees, as confusion can quickly become costly and time-consuming. 

Legal Advice & Employee Equity 

Engaging with professional expertise helps avoid mistakes and prevents later disputes between you and your employees. It is always a sensible investment.  Setting up a share scheme requires careful drafting of documents, clear communication with stakeholders, and compliance with legislation. Getting help early gives you confidence in your planning and helps align your share dealings with your wider business objectives.

One critical step often overlooked is securing board and investor approvals. Many shareholders’ agreements and investment terms grant key stakeholders veto rights over new share issues or options. Failing to check and obtain necessary approvals internally can not only breach agreements but also damage important relationships with colleagues and other investors. An outside eye can provide an important check of a company’s constitutional documents before finalising any offer.

Jurisdictional compliance is another key area where specialist advice is crucial. While UK businesses commonly use EMI schemes for employee equity, companies operating in Ireland must navigate a different landscape, for example. Ensuring compliance with your own local legal frameworks, tax reliefs, and regulatory requirements is a good reason to invest in professional advice. Working with lawyers who understand the nuances of equity operations ensures that your share schemes are not just well-structured but fully compliant with local law.

Equity Share Frequently Asked Questions