Q. I am an entrepreneur and I am thinking about a share scheme for my employees. What are the benefits for the employer and employee?
A.Typically, employee share ownership schemes, or share option schemes, are used by small businesses for the same reasons that they are used by large multi-national corporations: to incentivise, reward and motivate staff. For example, John Lewis, the department store, is fully owned by its employees and made record-breaking profits last year. Christopher Townsend a partner at law firm Mills & Reeve, says that most companies which start a scheme do so to help them retain their best staff: “The question to ask is whether or not I can attract and keep my staff without one.” Share ownership schemes can be particularly beneficial for small firms that can’t afford to pay large salaries like some of their bigger competitors. There have been cases where employees have made large profits from the stock they owned in their company. If the company expands or develops a great new product then stocks can surge in value.
Q. What schemes are open to me and how do I know which one is appropriate?
A..The fist decision to make, says Townsend, is to decide on whether you want to offer a share scheme or an options scheme. This is a crucial decision and can have ramifications for your plans for the business in the future. For example, if you want to sell the business in three years or less then think about stock options because it won’t swell the number of shareholders straight away leaving the entrepreneur free to make the decisions about the business. If you choose the options route then Townsend recommends using an enterprise management incentive plan (EMI). You can use an EMI if your company’s gross assets are less than £30m and if you have fewer than 250 employees. An employee can be granted up to £120,000 in options, and has to exercise them within 10 years. An EMI is a tax efficient scheme for the employees since you only pay income tax on the options if the strike price is below the market price of the shares when the option is first granted. Other types of options plans include non-government approved plans, which are subject to more taxes. The benefit of those plans is that they do not have the same rules as government approved plans. In all cases, if an employee exercises the option and then goes on to sell the shares, any gains they make will be subject to capital gains tax. If you choose a share incentive plan then the employee immediately owns an equity stake in the company. One of the benefits of this, says Iain Wallace, managing director of Sharemark, an independent share dealing service specialising in small businesses, is that it can develop a market for your shares. Rather than issue new shares, Sharemark can provide the “meeting” place for buyers (employees) and sellers (original shareholders – such as the entrepreneur himself). This can be useful if the company is expanding and you want a liquid stock in order to attract more investors. Entrepreneurs should also stipulate whether they want employees to surrender their shares if they leave a company.