Rewarding key employees with shares in a company can be an effective and low cost alternative to secure employee commitment. However, companies also need to bear in mind both the commercial pitfalls and the potential tax consequences for employees when establishing any share scheme.

The two primary alternatives when establishing share schemes are to either (i) give the employees the shares up front, but potentially retain the ability to buy those shares back if the employee leaves the company; or (ii) give the employee or a group of employees the option to buy shares in the company at a future date and at a set price (this is commonly referred to as an employee share option plan or ESOP)

In either case, the primary shareholders should ensure that they have the ability to compel the employees to sell their shares in the event of a trade sale. They should also consider whether they are willing to allow employees to have any voting rights and/or any rights to dividend payments by the company. Additional restrictions can also be placed on shares, including the ability to transfer shares and different prices that might paid to employees depending on whether they are "good leavers" or "bad leavers" when they leave the company.

Companies also need to be conscious of the tax consequences for employees under any share scheme. Depending on the structure, employees may become liable for either capital gains tax and/or income tax. This tax may be payable immediately by the employee, and could significantly reduce the take home pay of an employee, which can be an unpleasant surprise! However, with careful planning this impact can be reduced and managed.

Employee share schemes can be very effective and low cost. With some planning, an appropriate scheme can be put in place quickly and efficiently. However, some care is required to avoid potential pitfalls.

Disclaimer
This publication is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Leman Solicitors for any action taken or not taken in reliance on the information set out in this publication. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. Any and all information is subject to change.