Why get a valuation for an employee share scheme?

Valuations have an enormous impact on an employee share scheme. 

Simply put, you need to know the value of the shares for lots of different reasons, to ensure that your employee share scheme is operated without hurting the interests of your employees, other shareholders, or being fined for compliance failures. If your business is successful, future investors or purchasers of your business will want to check that you took a sensible approach on valuation. 

  • you need to make sure the value of shares received by the employee is sensible: enough so that it is motivating, not so much that you damage relations with current and future shareholders or other employees.
  • ou need to calculate the value of shares to work out how much tax is due: you need to do this every time you give options, every time you make fundamental changes to the employee share scheme, every time someone exercises an option to receive shares, and every time shares are bought back from an employee.
  • if your employee share scheme qualifies for tax relief, there are limits on the value of shares you can give. So you need to make sure you don’t use up these limits too quickly. 
  • when options are registered with HMRC, you will need to tell HMRC the value, and ideally tell HMRC that you agreed a valuation with them.

Tax law allows directors to create their own estimate of value without external advice, but if you get it wrong, it’s likely to result in the wrong amount of tax being paid and you giving too much / too little away. It’s difficult to correct mistakes with employee share schemes after the event.

Is there one true figure for a share valuation?


The same thing can have a different value to different people, depending on their circumstances.

For example:

  • a large shareholding (e.g. more than 50%) allows a shareholder to influence how the company is run. Someone may be willing to pay a premium for a large shareholding, because they can use their influence to extract more money from the company – this might by using their influence to run the company more efficiently, or to combine the company with other businesses. A large shareholder may use their influence simply to insist that a company pays out a higher percentage of its profits as dividends.
  • a director or senior employee may be willing to pay a premium for shares, because they no more about the company’s potential for growth and profits than an external investor.
  • an investor providing more funding for a company may be willing to pay a premium for shares: they will be investing in the belief that extra funding will grow the business, and therefore they may be a premium reflecting this potential for growth.
  • a small shareholding (less than 25%) doesn’t entitle the shareholder to influence the company. 

How does tax law deal with different values for different people?

Although in reality there may be lots of different people willing to pay a wide range of values for shares in your company, tax law needs to take a simplified approach.

It does this by assuming there is a ‘hypothetical buyer’ with limited knowledge of the business. We perform the valuation by putting ourselves in the shoes of this hypothetical buyer and only take into account the knowledge specified by tax law.

To deal with the range of different people and the different values they may be willing to pay, tax law specifies in some circumstances that we have to attribute particular preferences and particular knowledge to this hypothetical buyer. As a result, in our valuation reports we will refer to things like “whole company valuation”, “minority valuation”, “actual market value”, “unrestricted market value” or “money’s worth” – each of these terms refers to a different hypothetical person with different preferences and levels of knowledge, and therefore willing to pay different amounts for a share.

Who should you ask to do a valuation?

Valuations are typically performed by professional valuation experts, lawyers or accountants.

Because the valuation is needed for tax and legal purposes, valuations for an employee share scheme is a specialist area.
You should check with whoever you ask for a valuation that they have plenty of experience not just in business valuations, but the additional legal and practical considerations that arise from valuations for the purpose of an employee share scheme.

Granted has helped over a thousand companies with employee ownership and valuations for employee share schemes.

How can we make this simple?

Although there are lots of complicated rules and strategy considerations relating to share valuations, as part of our service we will make reasonable decisions based on our discussions with you.

The end result will be the valuations that you need for HMRC compliance without you having to make complex decisions yourself.

If you choose Granted to advise you the design of your employee share scheme, then our valuation report will support this advice and we will explain how to use the valuation to reach sensible decisions.

What information do we need?

If you instruct Granted to value your shares for an employee share scheme, we will need this information to begin with:

  • three years’ full accounts
  • management accounts (showing profit and losses and a balance sheet) for the current year (these should be not more than 3 months’ old)
  • financial projections, if available
  • details of holding companies / subsidiaries and any joint ventures or partnerships
  • details of any dividends since the date of the last full accounts
  • details of any investments in the business and transfers of shares in the last 2 years.