Employee Incentive Schemes

A share scheme is a way of founders sharing equity with employees. Equity in a company means ownership – anyone who holds shares in a company owns part of the company (and therefore its assets).

There are many different forms of share scheme, but they all work in one of two ways:

Equity now – employees are given actual shares in the company now

Equity later – employees are granted an option which gives them a right to purchase shares in the company at a certain point in the future (at an agreed price)

An EMI scheme provides selected employees with the option to acquire shares in your company in the future. You will have discretion to decide who participates, and the scheme can be tailored to different employees' role, seniority, and the value they bring to the business.

If required, the options can be subject to certain exercise conditions. This means that employees will be motivated to work hard, to ensure that the conditions are satisfied, and they will therefore be able to exercise their options. Typical EMI schemes include conditions relating to an exit of the company, time, and performance criteria.

To be able to grant EMI options, there are qualifying criteria that both the company and the proposed option holder must satisfy. In relation to the company, the conditions relate to matters such as the assets of the company, the number of employees, and trading activities. In relation to the employee, the conditions relate to their working patterns.

As EMI schemes are approved by HMRC, the tax treatment for both the company and the employee is favourable.

An LTIP is an employee incentive arrangement where participators' performance is measured over a period of time.

LTIPS usually involve participation by senior executives, and the incentive usually involves the provision of 'free shares' on the satisfaction of certain performance conditions over a period of time.

LTIPs are a useful tool in aligning interests of employees who are able to influence the success of the company.

Types of Long Term Incentive Plan

There are several kinds of awards that can be made under an Long Term Incentive Plan (LTIP), which are sometimes referred to as Performance Share Plans.

These include:

• nil-cost options
• conditional share awards
• share appreciation rights
• restricted shares.

The awards typically take the form of free shares being offered when certain conditions have been achieved.

LTIPs generally promote long-term staff retention, as multi-year vesting periods can ensure that participants remain with the company throughout the duration of the award.

A Company Share Option Plan (CSOP) scheme provides employees with an option to acquire shares in the company at a later date.

To qualify to grant CSOP options, the company must meet certain criteria. Provided the criteria are satisfied, favourable tax treatment will apply for both the company and the employees who are part of the scheme.

You have discretion to decide who will participate in the scheme, and the exercise of shares under CSOPs can also be subject to the satisfaction of certain performance conditions if required.

CSOPs are approved by HMRC, and therefore attract favourable tax treatment for both the company and the employee provided certain qualifying conditions are satisfied.

Growth Share Schemes are strategic initiatives that can be used to incentivise key employees by rewarding them in line with future business growth.

These types of incentives should be considered if it is anticipated that your company will achieve substantial growth in the future.

Growth shares allow the holders to benefit only from the growth in value of the company from the time the shares are awarded, which can motivate employees to achieve growth for the company.

Growth Shares typically amplify in value with the company's success, hurdle shares trigger additional benefits upon achieving performance targets and flowering shares escalate rewards tied to predefined milestones in the business.

Employee Share schemes (EMI Schemes) can be equally, if not more, beneficial to startups with few employees than to large companies with many employees.

Why should startups offer equity?