Scaling up? Time to incentivise your team with share options - Beyond Accounting - Dublin

Scaling up? Time to incentivise your team with share options

Have you ever considered offering key people in your company share ownership? If you’re chasing real growth, we believe this is a great way to get there. Offering share ownership is an effective way to consolidate strong members of your team with your business ambitions for long-term growth. If you want your team to join you in “thinking big”, then the solution is simple – give them something tangible to think big about!

Business growth means having the right people on your side

You are not going to create significant value in a global company without having great people committed to your success. There is no getting around the fact that this won’t happen with a basic salary alone. You have to be able to offer incentives, which means sharing opportunities and wealth among your team. A simple but effective way of achieving this is by expanding share ownership beyond the initial owner(s).

Not only have we offered shares to our senior leadership team, but it is a strategy many of our clients use as well. Only recently, we were at a meeting with a young entrepreneur who expects to go from €3 million to €10 million in the next few years. In order to do that, he has decided he has to bring in some of his executive staff as well as attract new talent to his team by giving them the option to buy shares in the company. This is not something he plans to offer all of his staff, but rather just those star players who he knows will be essential to the growth of his business.

Warning: do not give away your shares for nothing!

Ideally, what you want is for those key employees to be not only committed to your company as it is now, but also its future. Therefore, you want to ensure that they are not going to leave you for the competition in the next two to four years but instead will work hard to help you grow. This is why it doesn’t make sense to give them shares of what you have built up to date, rather you want to offer the future potential of the company. But how do you do this?

How to offer shares to employees and the tax consequences

Of course, you can’t just give employees shares for nothing without significant tax consequences. Shares offered in this way constitute an emolument or a salary, and therefore would be subject to income tax. So what are your options?

Whatever way you choose to set up a shares scheme in your company, make sure you conduct it in such a way that employees are rewarded for the future growth of your business.

1) Create a new class of share

Let’s say your company is currently worth €3 million and you’ve tasked a new employee with enhancing the value of the company over a period of time to €5 million. In this scenario, you might choose to create a new class of share in the company. The existing shareholder will have “ordinary” shares, but now you are going to create a new class of share and these new shares may be issued to the existing shareholder with a proportion given to the newcomer.

What you have achieved is that all of the new shares will only have value in the event of the company being sold for more than the current value of €3 million. You are locking in today’s value as being 100% attributable to the existing shareholder and you are creating a mechanism whereby growth over and above today’s value is apportioned between the current shareholder and the incentivised employee.

2) Offer share options

Perhaps your situation is different from the above example, and you are actually in the process of giving one final push for a sale and the exit horizon is only 18-20 months. If you’re bringing someone in to drive this sale for that period of time and you want to incentivise them with shares, the best option is to give them the opportunity to acquire shares at a certain point in time. This works by fixing the market value today and when, in a few years when the shares are worth more at the advance of the sale, you can give them the option to acquire shares at the low fixed price. This way they can sell them off after the sale at the higher share price.

Tax-wise there are two types of option schemes. You can either leave the shareholder with income tax exposure or take advantage of the KEEP (Key Employee Engagement Programme) scheme. KEEP allows the individual to pay Capital Gains Tax on the profit they made on the transaction. This approach means that the shareholder, while they do have to pay for the share they are getting, is only paying when they are exiting, which is helpful when avoiding cashflow problems.

3) Employee Stock Ownership Plan (ESOP) and Employee Share Ownership Trust (ESOT)

Some large organisations still use ESOPs and ESOTs; these are major share option schemes that require advanced Revenue approval, which can be a lengthy and cumbersome process. The issue is that with these schemes, all members of the company have access to share ownership, meaning you can’t cherry-pick your key staff. This option tends to only be used by very large companies where it makes sense for those at the top level as well as the bottom level of the company to have shares available to them.

At Beyond, we say help your senior management team finance their shares

You can offer your senior management team shares, but that doesn’t mean they can necessarily afford them. In this case, we advise companies to either tell their staff to get a bank loan, which the company makes repayments to via payroll, or to provide the loan themselves, in which case only a notional interest amount is subject to BIK tax. Either option secures the employee’s ownership of the shares because they have technically paid for it, even though they have taken on a liability for them.

With Entrepreneur’s Relief, you can also help your employees set up a tax-efficient exit plan for 3 to 4 years’ time. You can even organise an option agreement that states the company can buy those shares back at the same price should the employee leave employment before the 3 – 4 years is up. This way you get a lock-in for 3 to 4 years, the employee benefits from Entrepreneur Relief and you can avoid tax issues by financing the buying of shares with a bank loan.

Whatever way you choose to set up a shares scheme in your company, make sure you conduct it in such a way that employees are rewarded for the future growth of your business. Linking employee rewards to the value of the company is a great way to not only incentivise your key players to work hard, but it also engenders long-term loyalty which is a rare resource these days.

If you would like to talk to someone about your company’s financial health and identify opportunities for business growth, book a free health-check by calling 01 639 2963 or sending us a message.
Rory