A simple step by step guide to equity sharing
Research from Vestd, the share scheme and equity management platform, has revealed that a quarter of small companies in the UK share ownership with their employees. The pandemic and remote working has forced companies to look at new ways to build trust and a shared sense of purpose between employer and employee. Many businesses are also struggling to pay competitive salaries. They don’t want to lose people, but they can’t afford to pay the same the salaries they used to pay. This has led to a rise in the number of employers looking at this as an option.
Many employers are initially put off because they think it will be difficult or it will lead to problems. Ifty Nasir, CEO and co- founder of Vestd.com, has provided some essential top tips:
Keep it simple, over-complicated schemes are a nightmare and it’s not necessary.
Make sure you consider how you will manage leavers, particularly those that walk away without contributing fully to the business. A good scheme will ensure that they don’t walk away with shares that they’ve not earned.
Choose your scheme carefully, there are many of them. They all have their pros and cons, depending on your circumstances.
- Enterprise Management Incentive (EMI) option schemes works best for most start-ups, particularly if you don’t expect to have more than 250 employees. They have big tax advantages: your employees only need to pay the lowest rate of Capital Gains Tax (10%) on any gains, and the company can claim the cost against tax.
- Avoid giving Ordinary Shares to people. They’re not great for tax and you can’t attach any conditions to them (so you could give them to someone, and they could walk away immediately).
- ‘Options’ as the name suggests, is the option to get shares if pre-agreed conditions are met over a set period (typically four years or so). i.e. You don’t give employees the shares but you promise you will give them shares, if they want them, at an agreed time and when agreed conditions have been met.
- Growth Shares give employees a share in the growth of the business only from the time they are issued (this is known as the ‘hurdle rate’). These, like options, can be made ‘conditional’, so the recipient only gets to really hold them if they’ve delivered on what was agreed and your company has grown.
Make sure you have an accurate, up to date, table of who owns what in the company. If you don’t you will struggle to get the bank, or anyone else, to lend you money, and lawyers will charge thousands to find and fix things.
Use a specialist company not your accountant or lawyer to set up the scheme. It is MUCH cheaper.
This was posted in Bdaily's Members' News section by Katherine Adams .