Setting up a share options pool is a great strategy for companies who want to attract and retain talented employees while aligning their interests with the company’s growth. In this article, we’ll explore three critical considerations to ensure your share options pool is structured effectively.
1 – Legal and regulatory compliance
Setting up a share options pool requires careful navigation of legal and regulatory requirements to ensure you remain compliant and mitigate potential risks. In the UK there are two types of schemes to chose from, EMI or Non EMI. Here’s what each involves:
Enterprise Management Incentives (EMI) are a popular and tax-advantaged stock option scheme designed to help smaller companies in the UK attract and retain talented employees. To qualify for EMI, a company must have gross assets of £30 million or less and fewer than 250 full-time employees. This scheme allows companies to grant share options up to a value of £250,000 per employee, with a total company limit of £3 million.
The primary advantage of EMI options is the significant tax benefits. Employees granted EMI options do not have to pay income tax or National Insurance contributions (NICs) on the difference between the exercise price and the market value of the shares at the time of grant, provided the exercise price is at least equal to the market value at the date of grant.
Additionally, any gains made upon the sale of the shares may be subject to capital gains tax (CGT), which can be lower than income tax rates, especially if Entrepreneurs’ Relief is applicable, reducing the CGT rate to 10%.
Non-EMI Schemes
Non-EMI schemes include a variety of other share option plans that do not qualify for the specific tax advantages of EMI schemes. These can include Company Share Option Plans (CSOPs), Save As You Earn (SAYE) schemes, and Share Incentive Plans (SIPs).
- Company Share Option Plans (CSOPs):
- Available to any company, CSOPs allow options to be granted to employees up to a value of £30,000. CSOPs offer tax advantages similar to EMI schemes, with no income tax or NICs on the exercise of options, provided certain conditions are met.
- Save As You Earn (SAYE):
- SAYE schemes encourage employees to save monthly over a period of three or five years, at the end of which they can use their savings to buy shares at a discounted price. These options are free from income tax and NICs, and any interest or bonuses earned on the savings are also tax-free.
- Share Incentive Plans (SIPs):
- SIPs enable employees to buy shares directly, receive free shares, or have matching shares provided by the company. Shares held in a SIP for at least five years are free from income tax and NICs, and dividends can be reinvested tax-free.
While non-EMI schemes may not offer the same level of tax efficiency as EMI options, they still provide valuable incentives for employees and can be a critical part of a company’s overall remuneration strategy. Each scheme has its specific rules and benefits, making it important for companies to choose the one that best aligns with their strategic goals and employee engagement plans.
Before you get started with a share options pool though, it’s important to ask yourself what the strategic purpose is. How will this serve your business?
2. Strategic purpose and objectives
A well-designed share options pool should align with your company’s strategic goals and organisational culture. Areas to consider are:
- Employee retention and motivation: Determine how the share options pool will contribute to retaining key talent and motivating employees to contribute to the company’s long-term success. Options can serve as powerful incentives, linking employee compensation to company performance and growth.
- Alignment with company goals: Ensure that the vesting schedules (this means when the shares are actually owned by the individual) and performance conditions associated with the options are aligned with the company’s strategic objectives. In short, making sure employee objectives align with the company vision and how the terms of the share options pool will operate.
- Equity distribution: Balance the distribution of share options among different levels of employees. Everyone should be playing an equally important role and so fostering a sense of fairness and equity within the organisation allows everyone to feel the benefits.
So now you’re aware of the legal considerations and why you might implement an options pool, what about the admin, let’s take a look at that next.
3. Administrative and practical implementation
Implementing an options pool involves practical considerations to ensure smooth operation and to avoid it getting messy:
- Plan administration: Establish clear processes for administering the share options pool, including tracking option grants, exercise dates, and managing employee communications. A well-defined administration process takes away the guess work and missed deadlines.
- Valuation and accounting: Determine the fair market value of the company’s shares for pricing the options. Talk to your accountant about the best way to do this and check with your lawyer that your share agreement aligns with the recommendation.
- Regular review and updates: Setting up your options pool is rarely one and done but you also don’t want to change this too often. Setting periodic reviews to assess whether you need to update the share options pool to reflect changes in the company’s growth trajectory, organisational structure, and regulatory environment is a good idea.
Setting up a share options pool requires careful thought. It can be legally complex and so seeking the support of a legal firm, like Jamieson Law, to help you navigate it can ease the burden and provide peace of mind that you’ve set up well.
If setting up a share options pool for your company is something you’re considering right now, get in touch with us now on 03308184 248 or get in touch HERE to set up your free discovery call to discuss how we can help.
