USUALLY insider-trading rules are associated with large financial institutions, but earlier this week Facebook, the privately owned social networking site, had to implement its own insider trading policy.
Facebook, which issued stock to its employees up until 2007, established the new policy to ensure that employees would not get into a legal wrangle with the US financial regulator, the Securities and Exchange Commission (SEC), if they chose to sell their shares in the secondary market. So, what does this mean for UK entrepreneurs who have implemented employee share ownership schemes?
Facebook is a unique case. The company has more than 400m active users and estimates of its value exceed $11bn. Stocks in the company are currently in high demand and employees can probably sell their stock on the secondary market for a profit.
If you want to follow in Facebook’s steps and issue shares to your employees, then make sure you are aware of the pitfalls. Kevin Thompson, a partner at Clifford Chance says that private UK companies don’t fall within insider-trading rules: “The SEC’s regulation of share dealings in US private companies does not have a parallel in the UK.”
Colin Paterson, a partner at RM2, a specialist service in helping companies to create employee share schemes, agrees: “Regulations are not as stringent in the UK concerning share ownership in private companies. If an employee wants to sell their shares in your company then they are free to do so, subject to contractual agreements and as long as they operate within the confines of common law.”
But the Facebook case highlights a more serious issue of employee share ownership schemes: do entrepreneurs want their employees selling their shares privately to people without a direct interest in the business? A London-based entrepreneur who operates an employee share ownership scheme says there are ways to avoid this situation from coming up: “You could issue options in non-voting stock, although they are not normally in government-approved schemes.”
If employees want to sell their stock, then RM2’s Paterson recommends that business owners set up an Employee Benefit Trust, which acts as a market maker for the stock: “This creates an internal market for the shares, which is important since in the majority of cases private companies are not wild about selling their shares to everyone.”
Entrepreneurs need to strike the right balance when they implement share ownership schemes. They are a good way to incentivise staff, but make sure you don’t jeopardise control of your company.