What’s the point of employee share options?
Employees with shares perform better. That’s because they can see that if they generate more sales or save costs, there will be a direct impact on their own wealth.
Employees and founders benefit when employees get shares.
Why options, not a gift of shares?
If a founder simply gifted an employee shares, they would be treated as a bonus with high tax. The tax needs to be paid immediately, even though the shares can’t be exchanged for cash immediately. The employee could be stuck with a tax bill they couldn’t afford.
An option is a right to buy shares at a fixed price, in a period specified by the founders. If the purchase price is artificially cheap, there’s still tax to pay, but at least the employee can decide when to pay it, by choosing when to buy.
Why are some options called “EMI options”?
An EMI option is one that meets the requirements of the government’s ‘Enterprise Management Incentive Legislation’. The benefit is that a lower tax rate applies on any increase in value (10%).
What do founders need to decide about employee share options?
You have five big decisions to make:
- the total slice of the company to give away
- the total slice of the company to give to each employee
- the purchase price to set for each option
- when each option can be used to buy shares (e.g. must the employee wait until they’ve completed a minimum length of time in employment, or hit performance targets)?
- what happens when the employee leaves? Do they keep all, some or none of their options? Do they keep dividends and shares resulting from their options?
Some helpful content
How much to give away:
https://granted.co.uk/2019/02/18/how-much-of-your-company-should-you-give-to-your-employees/
https://granted.co.uk/2018/01/04/keeping-it-simple-with-employee-share-schemes-part-3-dilution/
Setting the purchase price and valuation:
https://granted.co.uk/2018/11/14/zero-valuations-seed-investment-and-employee-share-schemes/
https://granted.co.uk/2018/05/07/using-your-own-valuation-for-an-employee-share-scheme/
When each option can be used (vesting):
What happens when the employee leaves:
Still have questions?
Granted can answer them. We have the UK’s most experienced team of employee share option specialists, with the efficiency and great value of an online service.