What are share option schemes and how can they attract and retain key talent?

There are many things that keeps founders awake at night, 2 of which are:


1. Having enough cash to fund growth;

2. Attracting and retaining the right talent.


Offering the right incentive package is key to attracting the right people but getting the right balance between cash remuneration and other incentives can help you manage the finances.


What are share option schemes?


Share options schemes are a form of employee compensation that allows employees to purchase shares in the company at a predetermined price and time, usually at the point of exit. The price is set at a discount to market value, enabling the employees to sell these shares later at a profit.


Share options are used by companies to attract and retain talented staff as they are tax free at the point of granting the options and, when structured well, they can provide tax efficient rewards for the employees. For scale-ups, they tend to form a key part of any remuneration package as cash is tight in the early years.

Option schemes have the dual benefit of providing a financial upside for employees (which is usually self-funding) whilst also tying them into the business through the growth phase. This is because there are usually conditions attached to the option which include a set vesting period and the requirement to be an employee at the point of exercising the option.


This article explains the main share option schemes and how scale-ups can use them to incentivise staff.


What are the 2 main types of share options?


There are two main types of share option schemes:


Unapproved share schemes are very flexible as the company is able to structure the scheme in any way they like. However, they are called 'unapproved' because they are not pre-approved by HMRC and as such there are no defined tax benefits other than not being charged National Insurance or Income Tax when they’re granted.


Approved share schemes are less flexible because you must meet certain HMRC conditions to qualify but having met these conditions they do attract tax benefits for the employees which is attractive. The following schemes are approved by HMRC:

  • Share Incentive Plans (SIP);

  • Save As You Earn (SAYE) schemes;

  • Company Share Option Plans (CSOP); and

  • Enterprise Management Incentive (EMI) schemes.

EMI schemes are typically the most popular option scheme used by scale-ups as they are structured in a way that enables the employee to benefit in a tax efficient manner from any increased value generated in the company. The value is only gained on exit and the costs involved in setting up and maintaining the scheme are relatively low for the employer.


What are the advantages for the employee?


A well structured, approved share option scheme has the benefit of enabling employees to gain in a tax efficient way from the increased value that they have helped to create in the business.


With approved option schemes, the employee can exercise their options at the point of exit at a discount to market value then immediately sell their shares for a gain. This gain is subject to capital gains tax and can attract various reliefs including Entrepreneurs Relief, reducing the rate of tax to just 10%.


In contrast, if the company has an unapproved option scheme or has not met HMRC's criteria then the difference between the market value and the option price would be subject to Income Tax and National Insurance at the point of exercising. This can result in a hefty and unwelcome tax bill for the employee, at a time when they haven't actually realised any cash yet.


What are the downsides for an employee?


The downside of share options is that they come with risks. For example, if the share market goes down, the value of the shares may not increase as much as expected. This risk is partly mitigated with an option scheme when compared to a share incentive plan because the employees would not exercise options if there was nothing in it for them. However, employers should be mindful of this risk when assessing the overall incentive package for key staff.


What are the advantages for the company?


Scale-ups are cash strapped and so the average salary for scale-up employees is often only 90% (on average) of what they would command in the same role at a larger Corporate. Providing a share option scheme has the following main benefits for the company:

  • Boosting the overall remuneration package with minimal cash input from the company (just the cost of setting up and administering the scheme);

  • Securing key skills and talent in the business through the growth phase and in turn reducing staff turnover which can be high in the early years; and

  • Creating a strong culture in the company with everyone aligned on the Company's growth objectives and how they can play their own part.

How can I set up a share option scheme for my company?


Share option schemes are a win : win for everyone and are very much here to stay. To compete for talent in the scale-up market place you need to have a strong offer and a good share option scheme is integral to any scale-up remuneration package.


Thankfully, HMRC has made the process of creating a scheme and gaining approval straightforward for small businesses. Pre-approved policies, forms and option notes for EMI schemes are available and would be suitable for the majority of scale-ups.


Who can help?


It's important to get the right advice and support when setting up and running your scheme. There are ongoing administration and reporting requirements to ensure the scheme continues to meet HMRC's approval criteria and to ensure the tax benefits for the employees are retained. You don't want to set up a scheme only to find at the point of exit that it's deemed as unapproved simply because you haven't fulfilled your reporting requirements as this may lead to employees losing their tax benefits.


You should also set aside an option pool early in your growth journey so that investors understand how their share of the cake will be diluted over time. The majority of investors would expect to see an employee option pool from the outset because gaining staff buy-in to the growth strategy helps to secure everyone's investment.


Get in touch


At GrowthBuilders we’ve helped set up many different share option schemes for a wide range of startups and scale-ups. Get in touch today to find out more about the options available and your obligations as an employer.


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