Growth share schemes are an effective way to reward employees, and drive performance and desired company behaviours. Growth shares, hurdle shares and flowering shares can be a useful tool in incentivising your employees.
One such scheme, EMI options over growth shares allow a company’s employees to benefit from future growth in the value of the company, but on restricted terms. The value of the company, let’s say £5 million, is determined at the outset of the scheme. Employees are then rewarded on anything over and above this. Shares of this type are likely to be lower than the market value of actual shares issued, as they hold their main value once specified conditions are met.
Hurdle shares, allow employees to benefit from growth above a certain value. Taking the example above, if the current value of the company is £5 million, then the company may stipulate that an employee benefits from growth on anything above a higher specific figure.
Flowering shares allow employees to benefit once certain conditions are met. Typically, these would relate to a company’s performance (e.g. sale above a specified amount or based on turnover).
Common characteristics include:
Proceeds of a sale
EMI options over growth shares do not typically have rights to share in the proceeds of a sale or winding up until a certain amount has been distributed to the ordinary shares.
EMI options over growth shares may have no rights to dividends or a right to a proportion of any dividend that is paid out.
EMI options over growth shares can be given enhanced voting rights to enable the holder to qualify for entrepreneurs’ relief.
Avoids dilution of existing share capital
Issuing EMI options over growth shares does not dilute the current shareholding of exisiting shareholders. The issue of shares outright in the company would have that effect.
EMI options over growth shares are a useful way of providing long-term equity incentives to employees so that they might identify their interests more closely with those of the company’s shareholders. Furthermore, they can assist with employee retention and reward employees for taking a risk by investing their time and skill to help the company grow.
If a company offers shares to its employees, for free or at a discount, this is considered an employment benefit and is subject to income tax (20% basic rate, 40% higher rate). Any gains on EMI options over growth shares will instead be liable to capital gains tax (18% or 28%. This can then be reduced even further with the benefit of Entrepreneurs’ Relief.)
Issuing EMI options over growth shares can be supported with a subscription agreement. This may specify a vesting schedule and that the company has the right to repurchase the shares in the event that the employee leaves.
Issuing EMI options over growth shares is usually supported with a valuation. It is worth noting here that HMRC usually allows significant minority discounts on EMI valuations. In particular growth shares can achieve a low valuation as the nature of the scheme means the employee shares in the upside from today’s value. This may make them very attractive to employees.
We regularly advise on employee share schemes with growth share plans. For more information please contact Teri Hunter on 01628 4700004 or firstname.lastname@example.org.