Posted: Thu 26th Sep 2019
Share options can be a great way for small business owners to grow their company.
Zac Quinn, Enterprise Nation member, ICAEW accountant and director at GQ Consulting, shares some thoughts on how to offer them to staff efficiently while maintaining control over the business.
One of the questions I often get asked as an accountant for small, high-growth businesses is how to expand without blowing out costs. And, coming a close second, is the question: what help is out there to support me as an entrepreneur!
High on the list of developing small businesses is the ability to attract and keep high-performing key employees. EMI share options are a really effective potential way to enable you to do that cost-effectively.
EMI share options:
give employees a potential share in the long-term growth of a business
are relatively cheap to set up
are a tax-advantageous way to retain, attract and motivate your key staff while still maintaining control over the business
An EMI scheme could work for you if your business is:
a small company with fewer than 250 employees and gross assets under £30 million
not working in one of a few restricted industries, such as property, investment management and farming
looking for share options for some of its key full-time employees
It's a government-approved employee share option scheme designed specifically for growing entrepreneurial businesses.
Here are some of the benefits of an EMI share options scheme.
For the employee, there's no tax on gift of options (when granted) or on exercise (when converted to shares), only on eventual sale. And then, assuming certain criteria are kept, only subject to capital gains tax, which could be at 10% given the scheme's ability to claim entrepreneur relief.
The options just need to be capable of being exercised within 10 years. You're free to set the option price, but they must be options on ordinary shares (not convertible shares). Importantly, shares can be a different class of ordinary shares from the founders – for example, non-voting shares, which means that even when shares are exercised the voting rights of the founders won't change.
The employee can lose their options if they leave the company within a specified period of time. It might also mean you can attract higher-quality staff, even in the early stages of growth when it's difficult to pay a market salary.
Here's an example: Say you offer your key employees an option to buy 1,000 shares at £1 each if the company is sold. If at that point the shares are worth £10, the employee exercises the options and buys the shares at £1 and then sells at £10, netting a profit of £9,000.
The gain is a capital gain but as they are EMI share options they get entrepreneurial relief so only pay tax of 10% (so £900). If that same £9,000 profit had been structured as some type of bonus, it would potentially have been taxed at nearer 50%!
It's worth highlighting too that if the company doesn't go up in value, the employee doesn't have to exercise the option. So, it's basically risk-free for them.
Giving shares is possible but is less tax-efficient and potentially reduces your control over the company. If you give shares for free, it would likely be deemed remuneration and the value of the shares taxed at income tax rates.
Furthermore, unless the criteria are met for entrepreneurs' relief (i.e. minimum 5% voting shares, held for two years, etc.), any gain would be taxed at the capital gains tax rate. From a founder's perspective, the benefit of share options is that if the employee leaves before the options are exercised, the options would lapse. One reason why the employee has an incentive to stay!
In today's volatile market, building a business where the key employees all have a stake in the success of the firm can be very powerful. Add to that a tax-efficient way to do it and perhaps it's a strategy worth pursuing.