ESS webinar digest: after EMI with Ian Shaw

Last week's ESS webinar was packed with practical takeaways for companies looking to introduce, or improve, their employee share schemes. The event was split into two tracks: EMI schemes with Jerry Davison, and after EMI with Ian Shaw.

This post summarises track two. Our thanks go to Ian Shaw for taking part, and Capdesk CEO Christian Gabriel for hosting.

 

Limitations of EMI schemes

It’s not always a case of ‘after’ EMI, as some companies won’t qualify for the scheme at all. Non-qualifying trades include:

  • hotel management
  • financial services
  • law firms
  • accountancy firms

For a company that does start with an EMI scheme, however, they become ineligible after exceeding the gross assets test of £30 million or employing over 250 people – whichever comes first. 

 

The three share types

At a top level, there are effectively three types of incentives to choose from: share options, cash-based options and an issue of shares (perhaps subject to forfeiture provisions).

Share options like EMI give the holder the right to buy either according to a time-based schedule or at exit only. Exit-only options are less popular in the US. In general, leaver provisions in the US are much more employee-friendly than in the UK and Europe.

 

CSOP: the first stop after EMI

After EMI you may be able to set up a Company Share Option Plan (CSOP), another kind of share option. A CSOP provides broadly similar tax treatment upon exercising, although you generally need to hold the option for three years before exercising.

However, the limits on CSOPs are lower than EMI schemes. The value of an employee’s shares under option must not exceed £30,000 as at the date of grant. If you’re planning to grant CSOP options to an employee, you should check the value (as at the date of grant) of their shares under EMI option first – the grant of a CSOP option can in some circumstances disqualify their EMI options.

 

Non tax advantaged options

Another kind of share option is a non tax advantaged option, also known as an unapproved option. It is non tax advantaged because employees will need to pay income tax when the option is exercised.

 

Cash-based options

Cash-based options are more common in specific scenarios, such as:

  • When you have employees in countries where share options are difficult
  • When there’s a reason not to want employees to share in company equity
  • When a company’s option pool has been maxed out

These are sometimes known as shadow equity or phantom options, because it’s not possible to turn them into shares.

 

Restricted stock

The third option is issuing actual shares to employees as restricted stock, but the employee will (assuming they sign an s431(1) election on acquisition) pay income tax (and potentially NICs) on the value of the shares when they receive them to the extent they do not pay the unrestricted market value for those shares.

If the shares are valuable, this may not be attractive.

 

Growth shares

Where the company's shares are valuable, it may be worth considering growth shares or a JSOP. Growth shares are a separate class of share which generally benefit only from the future increases in the company's value, and are generally found to have a value of 10-15% of an ordinary share – which means a lower acquisition cost, or if the shares are gifted to the employee, less tax to pay on acquisition.

 

JSOP

One final scheme to mention is a JSOP, or Joint Share Ownership Plan. JSOPs involve splitting the interests in the shares into the existing market value (held by a third party such as an EBT trustee) and the future market value (held by the employee).

They avoid having to establish a new share class, so are a good option for public companies.

 

Get in touch Cta

 

How to select an employee share scheme as a scale-up

If your company is across multiple jurisdictions, you’ll have to decide whether to set up one scheme or a scheme in each jurisdiction, and the extent to which you want to optimise the scheme for tax in those jurisdictions. If you have a presence in the US, for example, you may need a 409a valuation before you grant options.

 

Employee share schemes and liquidity events

Besides a sale or an IPO, there are two main routes to liquidity for employee shareholders:

  • An employee benefit trust, whereby employees can sell their shares to the trust, with the trust funded by the company to buy the shares. 

  • A secondary sale, whereby unlisted shares are sold by employees – often to investors. 

For EMI schemes, employees may be able to get the BADR rate of capital gains tax (10%) if the disposal of the shares is two years or more from the date the option was granted.


Awarding shares to non-employees

Although advisors, consultants and non-executive directors don’t qualify for EMI or CSOP shares, they are often given growth shares or JSOP shares. As an employer, you need to proceed with caution. Making an offer of shares is a regulated activity in the UK and requires authorisation or an exemption.

Similar regulation exists in the US, where you may be required to make federal and state securities laws filings, sometimes before you can even make an offer. It’s always worth seeking legal advice in the relevant jurisdiction before you proceed.

Not what you were looking for? Read our blog post on track one with Jerry Davison to learn the ins and outs of EMI schemes.

Want to know more? Reach out to us and we can connect you with either Jerry Davison or Ian Shaw.