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Which equity incentive plan is right for my business? – Part 2
3rd Sep 2020
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Which equity incentive plan is right for my business? – Part 2 - Linkilaw Solicitors
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Employee Option Schemes

What are employee option schemes?

Employee option schemes, like salary, bonuses or benefits, make up part of an employee’s overall compensation package. There are multiple types of option schemes, but the common factor is that they give employees the opportunity to buy shares in a company at a reduced cost at some point in the future.

In this post, we will review the different types of employee option schemes available in the UK. For more information on share incentives, check out our post reviewing the types of UK share incentive plans.

 

What types of option incentives are available in the UK?

There are four main types of option incentives available in the UK:

  1. Standard Options;
  2. Enterprise Management Incentive (“EMI”) Schemes;
  3. Company Share Option Plans (“CSOPs”); and
  4. Save As You Earn (“SAYE”) Schemes.

Standard Options

Standard options give employees the right to purchase a certain number of shares in the company at a later date at a specified price, known as the “exercise price” or the “strike price”.

Unlike with the transfer of actual shares, which give employees direct ownership in the company, option-holders are not automatically shareholders. Rather, option-holders only become shareholders when they exercise their options. This often makes options more attractive to companies who wish to incentivize employees via equity, but would prefer not to give them direct ownership right away.

Although it is possible to give employees options without issuing them under an HMRC-approved option scheme, companies that do so do not receive the tax benefits of an approved scheme. Since most companies meet the requirements of at least one of the approved option schemes, it is less common for companies to issue standard, unapproved options.

Enterprise Management Incentive (EMI) Schemes

Enterprise Management Incentive (EMI) schemes perhaps the most well-known of the approved option schemes available in the UK. This is likely because EMI schemes provide additional tax benefits over the other types of approved option schemes described below. The tradeoff, of course, is that there are stricter requirements for a company to be eligible for an EMI scheme:

  1. Business Type. Certain types of businesses are categorically excluded from eligibility for EMI schemes, including banking, farming, property development, and legal services.
  2. Number of Employees. The total number of employees at the company – or, again, if the company is a member of a group of companies, the total number of employees at the group – must be less than 250.
  3. Company Control. The company cannot be under the control of another company, and there must not be any arrangements in place for another company to obtain control.
  4. Share Value. The value of the shares under option to any one person cannot exceed £250,000. Note that the value of the shares under option is calculated at the date the options are granted.
  5. Gross Asset Value. The value of the company’s gross assets – or, if the company is a member of a group of companies, the value of the group’s gross assets – must be less than £30 million.

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Company Share Option Plans (CSOPs)

Company Share Option Plans (CSOPs) are discretionary option schemes, meaning the company can choose which of their employees are eligible to participate. As an approved option scheme, there are certain tax benefits available for CSOPs, but there are a number of requirements that have to be met in order for an option plan to qualify:

  1. Company Control. The company cannot be under the control of another company.
  2. Share Value. The value of the shares under option to any one person cannot exceed £30,000. As with EMI schemes, the value of the shares under option is calculated at the date the options are granted.
  3. Exercise Price. The options must have an exercise price of at least the market value of the shares. As above, the market value is calculated at the date the options are granted.
  4. Self-Certification. The company must self-certify to the UK tax authority that the CSOP meets all of the relevant conditions.

Save As You Earn (SAYE) Schemes

Save As You Earn (SAYE) schemes are non-discretionary option plans, meaning that, generally, participation must be offered to all employees who reside in the UK. The plan involves the grant of options alongside a savings arrangement. Under the savings arrangement, deductions from the employee’s salary are paid into a savings plan each month, and the savings are ultimately used to exercise the options. Companies can choose whether to grant three-year options or five-year options. As with any approved option scheme, there are certain tax benefits to implementing an SAYE scheme, as well as certain requirements that must be met:

  1. Exercise Price. The exercise price for the options cannot be less than 80% of the market value of the shares under option. Like the CSOP requirement, the market value of the shares under option is calculated at the date the options are granted.
  2. Deduction Cap. The amount of money deducted from the employees’ salary for payment into the savings plan is limited to £500 per month.
  3. Self-Certification. Again, like the CSOP requirement, the company must self-certify to the UK tax authority that the SAYE scheme meets all of the relevant conditions.

Conclusion

There are a number of equity incentive structures available in the UK, including approved and unapproved share incentive plans and option plans. It is important to understand the differences between how each type of equity incentive operates, including advantages and disadvantages, in order to determine which type of equity incentive plan is best suited for your company.

In the next post in this series, we will compare and contrast the various types of share and option plans available to help you determine which type of equity incentive plan is right for your business.

Contact our team today for more information on this topic.

Our legal commentary is not intended to be a comprehensive review of all developments in the law and practice. Please seek legal advice before applying it to specific issues or transactions.

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