Shoots Slides
Upcoming SlideShare
Loading in...5
×

Like this? Share it with your network

Share
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
259
On Slideshare
259
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
0
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Rewarding employees and directors with equity di t ith it LAWYERS WITH A CAMBRIDGE ATTITUDE Growth | International | Protecting | Restructuring www.taylorvinters.com
  • 2. Rewarding employees and directors R di l d di t with equity Quentin Golder Karl Pocock Partner Consultant Taylor Vinters Taylor Vinters Entrepreneurial Business Team LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 3. Why Wh equity? it ? • Effective incentive: - studies indicate companies with employee share schemes out-perform p p y p companies without, often by significant margins • Tax advantages: - for both company and employee - capital versus income - NIC savings • Cashflow advantages: - a company can provide a benefit to employees without having to fund it with cash • Potential windfall gain for employees on exit LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 4. Shares versus options Sh ti Shares (pros): - actual ownership versus right to acquire - potential for dividends - voting rights - right to attend general meetings - cash commitment from employee LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 5. Shares versus options Sh ti Shares (cons): - shares must be paid for p - income tax issues if acquired for less than market value - what to do if the employee leaves? - dispersed shareholding can be an administrative hassle - l logistical problems on f h investment or sale l bl further l LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 6. Shares versus options Sh ti Options (pros): - no need for employee to part with cash on grant - can still provide equity windfall - on ceasing employment options can lapse - no issues regarding voting - can be tax efficient for employer and employee - flexible – can be made subject to conditions, and tailored to particular employees LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 7. Shares versus options Sh ti Options (cons): - may not create same sense of commitment - no voting/dividend rights - conditions on exercise can be beyond employee control - if share value drops then essentially unexercisable LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 8. Attitude f i Attit d of investors to employee t t l equity • Incentivising management/employees generally seen as essential • Typically a percentage of equity is notionally allocated for employees, eg 10% employees • Size of awards to individuals variable depending on size and value of company LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 9. How to t h H t get shares ( opposed t (as d to options) into employee hands? • Allot at early stage, while values low • Use HMRC approved schemes eg - SIP - SAYE (but limitations) • LTIPs (generally only suitable for listed companies) • Loan to employee to pay for shares (but debt still remains) • Pay bonus to employee to cover costs of acquisition and tax (fiscally inefficient) LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 10. How to t h H t get shares ( opposed t (as d to options) into employee hands? Cont . • Allot shares as unpaid (debt remains owing) • Use of ‘growth’ shares ie shares which only provide a return if certain financial thresholds shares, are achieved on a liquidity event. The share rights depress the value of shares acquired making them more affordable (not always suitable) • Use of ‘deferred’ shares, ie investor shares converted to valueless shares if certain milestones achieved, effectively increasing the share percentages of founders/employees (limited application) LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 11. Use f ti U of options • Most flexible and (potentially) tax effective method to pass equity to employees • For early stage companies in Cambridge the two most typical forms are are: - Enterprise Management Incentives (EMI) - Unapproved options LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 12. EMI options ti • Company requirements: - companies must carry on a qualifying trade in the UK (changes from 6 April) - “qualifying trade” – trades that are not “excluded activities”, ie dealing in land, banking, insurance, leasing, legal, accounting, property development, farming, hotels farming hotels, shipbuilding - no more than 250 employees - gross assets not more than £30m h - independence – not a subsidiary of another company LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 13. EMI options • Company requirements: C i t - limit of £3M (based on market value of shares subject to options at their date of grant) of issued options outstanding. p g - shares must be fully paid and non-redeemable
  • 14. EMI options ti • Eligible employees: - must not hold options over shares in excess of £120k at date of grant - 30% material interest threshold - minimum work time commitment (25 hours per week, or 75% of working time) • Options must be exercised within 10 years LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 15. EMI options ti Benefits: • Flexibility – as to voting, conditions of exercise, price voting exercise •Tax position: - no income tax on grant - no income tax on exercise if: (a) a qualifying option; and (b) there was no discount to market value at date of grant - on sale of underlying share – CGT at 18% LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 16. Potential P t ti l problem with EMI options bl ith ti • Disqualifying events, eg company or employee ceases to meet EMI requirements. Tax benefits lost unless option exercised within 40 days. • Disqualifying event occurs: - may not be realised at time - if the option is subsequently exercised, there can be adverse tax consequences if the parties are unaware of its non-qualifying status - if not picked up, then liability may b ld significantly f k d h l bl build f l LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 17. EMI options – tax example (1) • Option O ti over 100 shares at £50 per share, so exercise price is £5 000 h t h i i i £5,000 • Market value at date of grant is £50 per share, so £5,000 in total • Market value at exercise is £300 per share, so £30,000 in total • Income tax due on exercise £0 (assuming exercise within 10 years and a qualifying option) • On sale of shares, capital gains tax due on difference between exercise price and sale price
  • 18. EMI options – tax example (2) • Option O ti over 100 shares at £50 per share, so exercise price is £5 000 h t h i i i £5,000 • Market value at date of grant is £100 per share, so £10,000 in total • Market value at exercise is £300 per share, so £30,000 in total • On exercise income tax due £5000 (ie difference between exercise price and market value at date of grant) ) • On sale of shares, capital gains tax due on difference between market value at date of exercise and sale price
  • 19. EMI options – tax example (3) • Option O ti over 100 shares at £50 per share, so exercise price is £5 000 h t h i i i £5,000 • Market value at date of grant is £100 per share, so £5,000 in total • Disqualifying event occurs (when market value is still £5,000), and option not exercised within 40 days • Market value at exercise is £300 per share, so £30,000 in total • On exercise income tax due on £25,000 (ie difference between exercise price and market value at date of disqualifying event) • On sale of shares, capital gains tax due on difference between market value at date of exercise and sale price
  • 20. Unapproved options U d ti • Completely flexible as to terms • Options can be granted over any type of shares, at any price, with whatever exercise shares price conditions as the company may impose • No restriction on who options can be granted to LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 21. Unapproved options U d ti • Tax treatment - no income tax on grant - on exercise income tax on the difference between the exercise price and exercise, the market value of the share on exercise (less anything paid for the grant of the option) - tax charge on exercise arises whether or not shares sold h h h h ld - on a subsequent sale of the shares, CGT will be payable LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 22. Restricted h R t i t d shares • Tax treatment - “restricted shares are subject to a specific tax regime when granted to restricted shares” employees or directors • What are “restricted shares”? - shares are restricted if: (a) they can be forfeited in certain circumstances (eg on leaving the company) ) (b) a right over, or conferred by, shares is limited (eg have to sell shares to specific purchasers); or (c) the shares impose a disadvantage on the shareholder LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 23. Restricted h R t i t d shares • Purpose of regime? - without specific tax regime, income tax could be avoided by artificially reducing share values and increasing them at a time when income tax is not payable - rules can apply to innocent transactions so care needed LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 24. Restricted h R t i t d shares • How are restricted shares taxed? - income tax is not chargeable on acquisition except in limited circumstances - if restricted shares are acquired for less than their unrestricted market value income tax is charged when either: (a) the restriction expires or is lifted or varied; or (b) the restricted shares are sold with restrictions in place - income tax is chargeable on the proportion of the unrestricted market value at the time of the taxable event, less any allowable expenditure - PAYE may be operated and NICs charged depending on facts LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 25. Restricted h R t i t d shares • Example of income tax charge ( ) (a) unrestricted market value of the shares on acquisition is 100 q (b) restricted market value of the shares on acquisition is 70 ( ) (c) discount is 30% ( (the “chargeable p p g proportion”) ) (d) unrestricted market value on disposal is 200 (e) income tax chargeable on 60 (ie 30% of 200) - more complicated if only one of a number of restrictions is lifted, but can elect to treat all restrictions as lifted at that time LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 26. Restricted h R t i t d shares • Income tax when shares have decreased in value - Example: (a) unrestricted market value on acquisition is 100 (b) restricted market value on acquisition is 70 (c) discount is 30% (the “chargeable proportion”) (d) unrestricted market value on disposal is 50 (e) income tax chargeable on 15 (ie 30% of 50) LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 27. Restricted h R t i t d shares • Alternative tax treatment - employer and employee can jointly elect for different tax treatment • What effect does an election have? - employee subject to income tax at time the shares are issued - tax charge is based on the unrestricted market value of the shares less the price paid - no further income tax will arise when restrictions lifted or shares sold (although CGT may be payable) LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 28. Restricted h R t i t d shares • Should you make an election? - Pros: (a) upfront tax charge is known and may be affordable (b) potential tax saving if unrestricted value increases considerably - Cons: (a) employee may forfeit shares even though paid the tax (b) shares may not increase in value so tax paid higher than if no election (c) will have to find cash as no disposal proceeds LAWYERS WITH A CAMBRIDGE ATTITUDE www.taylorvinters.com
  • 29. Taylor Vinters Merlin Place Milton Road Cambridge CB4 0DP 01223 423444 Taylor Vinters is regulated by the Solicitors Regulation Authority (SRA Number 67782) and is authorised and regulated by the Financial Services Authority for investment business. This firm is regulated by the Solicitors Regulation Authority and authorised and regulated by the Financial Services Authority for investment business. www.taylorvinters.com