Share options: how to use them to attract and retain staff
Do you want the top talent working at your startup? Well, one of the best ways to make it happen in today’s competitive job market is to offer employees and contractors share options as part of their compensation package. Share options are a great way to attract, retain and reward your staff.
In this article, we’ll explain share options and how you can use them to build your dream team.
What are share options?
Share options are a form of equity that give employees, advisors and consultants the right to purchase shares in the company at a fixed price, usually at a discount to the market price and a nominal amount that doesn't require an upfront financial investment. These options give recipients the opportunity to become shareholders in the company and share in its success.
Share options convert into shares after a certain period of time (known as vesting). They’re a great incentive for employees to work together towards common goals, knowing that they’ll be rewarded when they hit certain milestones. Share options can be offered as a benefit to employees in addition to their salary and other benefits.
Employees can sell their shares later on. The more the company is worth, the more money recipients will get for their shares. It’s a great way to build cohesion and reward employees while getting everyone to care about the company’s success.
For UK companies, the two most common ways to give share options to employees are:
- EMI scheme - backed by HMRC, this scheme is for UK-based PAYE employees or directors who work for your company at least 25 hours a week or 75% of their working hours. The EMI scheme is great because it has tax advantages for employees and companies.
- Unapproved scheme - for recipients and companies that don’t qualify for EMI, this scheme isn’t backed by HMRC and doesn’t have tax advantages, but allows you to still give equity if you can’t do so under the EMI scheme. Unapproved share options are good for giving equity to consultants and advisors who work less than 25 hours a week for you, as well as your employees abroad.
SeedLegals helps companies easily set up their share option schemes (Both EMI and unapproved) and manage them over the long term. Employees also get a login so they can monitor their options themselves.
What are the benefits of share options?
Share options can benefit both employees and companies and have become a common perk for companies to offer - some top employees won’t even consider jobs that don’t offer share options.
Benefits of share options for companies:
- Increase productivity and engagement - employees, consultants or advisors are more driven to do their best when they have a stake in the company because the more successful the company is, the more financial reward they could reap.
- Attract and retain the best talent - the most talented people look for the best benefits, so offering equity in your company will be something those top employees and consultants are looking for. Offering share options shows team members that you value them.
- Give more company benefits without spending more - share options are a good way to add to the benefits package without draining cash flow. All you need to do is choose a cost-effective way to set up and run your options schemes and you’ve got a high-reward benefit for employees at a low cost.
- Build cohesion - align employee interests with company interests by giving them a sense of ownership in the company.
- Improve staff loyalty - because of the increased investment team members have in a company where they have share options, they’re more likely to stay for the long term so they can turn their options into shares.
- Remunerate tax efficiently - share options allow you to offer financial rewards to team members in addition to their usual remuneration, with tax benefits. With an EMI option scheme, when your employee exercises their options your company can claim a Corporation Tax (CT) deduction equal to the financial gain of your employee).
Benefits of share options for employees:
- Invest in financial future without financial risk - having share options means recipients can cash them out for a large amount of money in the future, without making a large upfront investment, so there’s nothing to lose.
- Experience deeper motivation at work - knowing that they’re working towards a large financial reward gives many employees more motivation at work due to a sense of ownership and investment in the company. This often leads to an increased sense of fulfilment and happiness.
- Benefit from tax advantages when EMI shares are sold - if someone receives share options under the EMI scheme, when they eventually sell their shares after keeping them for two years, capital gains tax is reduced from 20% to 10%.
- Share in the company’s success - share options show team members that they’re valued, and that everybody can enjoy the company’s success.
When is the right time to set up a scheme?
There are two optimal times to set up a share options scheme:
- When you’re growing your team - if you have a share option scheme in place as a benefit, it will be easier to attract top talent.
2. When you’re raising capital - having a share option scheme in place makes you more attractive to investors because it’s a good sign that you’ll be able to attract and retain talented employees that are motivated, which means your company has an improved chance at success.
How do you set up an options scheme?
- Choose your scheme - will EMI or Unapproved work best for your company? Many startups choose to run both types of schemes. You’ll need to understand which schemes you’re eligible for.
- Select a scheme provider - you can set up share option schemes through a lawyer or accountant, or you can use specialist providers like SeedLegals at a fraction of the cost.
- Decide on your scheme rules - when will the options become shares? This is known as a vesting schedule. Some companies choose to make the options available as shares after hitting certain milestones; some companies decide that options will only become shares when the company is sold. It’s up to company decision-makers to strategise what will work best for everyone.
- Get approval from shareholders - when you’ve got clarity on how you want to move ahead with the option scheme, get approval from your shareholders.
- Set up your scheme - your provider will help you set up your scheme when you’re ready to move ahead. You can set up your scheme in minutes on SeedLegals - all you need to do is create an account, and follow the prompts to set up your scheme online. You’ll also have unlimited support from a share options expert to guide you and answer your questions.
- Communicate the scheme to your team - when your scheme is all set up you can communicate how it will work with your existing employees and advertise it in job descriptions for new team members.
- Manage your scheme - you’ll need to maintain the scheme by adding new team members and allowing recipients to monitor their shares. When you use SeedLegals, it’s easy to manage your scheme - employees can log in and monitor their options themselves and adding new team members takes just minutes.
Book a call with a SeedLegals share options expert or start your 7-day free trial to learn more about how to set up and manage EMI and unapproved share option schemes. They’re trusted by 50,000+ businesses and set up option schemes 4x faster than anywhere else, so you’ll be in good hands.