Share schemes can be an attractive workplace savings option, helping employees to save while encouraging engagement with an organisation’s business performance.
Caroline Sherrington: Share options are a flexible way for employers to share equity with staff
Equity can be a great way to attract and incentivise employees while preserving precious cash reserves, and there are typically two ways to offer it: the transfer or issue of shares to an individual, and the granting of share options.
When shares are transferred or issued to employees, they become the legal owner of shares in an organisation and will be listed on the organisation’s register of members. Depending on the rights attached to the shares received, individuals could also become entitled to dividends, voting rights and proceeds from the sale of the business. Note that the grant of shares may also give rise to an immediate tax charge for the individual.
Rewarding employees with share options can be a useful and more flexible way for an organisation to share its equity. It gives option holders a right, but not the obligation, to acquire a set number of shares at a fixed price in the future, meaning the option holder is not automatically a shareholder but could become one when they exercise their options.
There are a number of points to consider when implementing any equity incentive scheme: tax implications; share value; flexibility, what happens to shares when an employee leaves?; timing, when should the individual be able to own the shares?; and legal documentation. It is much harder to clawback shares or lapse options when detailed vesting or leaver provisions have not been set out.
Caroline Sherrington is senior counsel at Ignition Law