Ipsa Tcd Pres 13 Dec 11 Final


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I gave this presentation with Cormac Brown as part of a series of presentations designed to highlight the role share-based remuneration can play for high-potential start up companies

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Ipsa Tcd Pres 13 Dec 11 Final

  1. 1. Equity Based Incentives Trinity Research & Innovation Niall Kavanagh- Elan Corporation plcCormac Brown - MASON HAYES & CURRAN
  2. 2. Independent national association operating within IBEC Promote all forms of Employee Share incentives (ESI) Executive Council drawn from Membership Represents various types of business and commercial activity.
  3. 3. Aim – promote Affiliated to IBECFounded in 1978 profit sharing in in the 1990s Ireland Conferences, road Unique Renamed shows and relationships RC , lobbied Gov Dept and EUDevelop links with IPSA contribute to International employer bodies EU projects on Profit-sharing (e.g. Amcham) equity incentives Association (IAPF)
  4. 4. Terminology Restricted StockEmployee Long term Share incentiveOwnership packages Trusts Options Profit Equity sharing awards Employee financial involvement
  5. 5. Foundations PeopleEmployee Increase No One- look afteract/think their net Size-Fits- their ownas owners worth All assets best
  6. 6. Perfect Storm Regulation Lack of complexity CashNeed to get to Need goodmarket peoplequickly Demanding investors Equity Awards
  7. 7. Cliché
  8. 8. Cash Burn
  9. 9. Burn Rate • 3 Funding Rounds • Less DilutionCash Funding Inflection FR 2 FR 3 FR 4 Round 1 point Time
  10. 10. Leaving
  11. 11. Innovation Private Motivationcompany Structure Cost/Benefit People
  12. 12. Introduction• Finance Act 2011 changes• Taxation of share schemes• Types of scheme• Saving tax?• Restricted shares• Questions
  13. 13. Finance Act 2011 changesOverview• Employer now responsible for PAYE on share awards• Share options – employee pays directly• Employee’s PRSI extended to share awards• Universal Social Charge due on share awards – 7%
  14. 14. PRSI – current situation• No employer PRSI• No employee PRSI on historic grants – 2011 only• Share awards and share options• 2012 no employee exemption
  15. 15. Schemes affected• All schemes which involve the granting of shares to employees• Stock options• Restricted Shares• Restricted Stock Units (RSU)• Employee Stock Participation Plans (ESPP)• Long Term incentive Plans /LTIP locked in Shares with vesting• Free Shares• Share Matching Plans
  16. 16. Employee Equity Incentive Awards• Value of shares taxed as benefit-in-kind• Value of share = amount liable to tax• Share options – profit on exercise• Restricted stock units – value of shares on vesting• Capital Gains Tax on disposal• Income tax / CGT – 52% v 30%
  17. 17. Share Schemes – Current Position IT PAYE USC PRSI SHARE N Y Y Y AWARDS SHARE Y N Y Y OPTIONS
  18. 18. Revenue approved• Save As You Earn• Approved Profit Sharing Schemes• Approved Employee Share Ownership Trust (ESOT)
  19. 19. Revenue unapproved• Share Options• Restricted Stock Units (RSUs)• Phantom Share Schemes• Restricted Shares• Sale Share Plan• Joint Ownership Plan (JSOP)• Growth Shares• Deferred Convertible Shares
  20. 20. Share Options/RSUs• Entitlement/promise of future share• Very popular – U.S. /tech firms• Retention/performance criteria can be used• Flexible• Easily understood• Disadvantage – income tax 52%
  21. 21. Tax = 52% Tax = 30%
  22. 22. Share awards• Classic issue – how is tax liability financed?? - Options – exercise to sell - RSUs – vest and sell - 52% Income tax on gain• Best result = gain liable to CGT 25% - Get share low and sell high - Value grows into share over holding period
  23. 23. CGT treatment – 25%• Employee needs to own share• Bad leaver provision• Income Tax on acquisition – issue• Start up companies – value of shares • No/low value, no/low tax• Established companies • Minority discount – up to 90%?? • Different share classes
  24. 24. CGT treatment• Aim – suppress value on acquisition• Sale shares • Participate in proceeds on sale.• Growth shares • Value grows into shares on meeting defined targets• Anti-avoidance issues• “Beauty” of restricted shares
  25. 25. Restricted shares - clog• Beauty - reduces cost on acquisition - CGT on exit• Agreement to restrict share transfer = tax reduction• No sale/transfer for restricted period• Income tax/PRSI on taxable amount• Very beneficial relief, no firm wide requirement• No statutory approval required
  26. 26. Restricted SharesRestricted shares – reduction in taxable value of shares where heldfor specified period. Holding Period Years Reduction 1 10% 2 20% 3 30% 4 40% 5 50% >5 60%
  27. 27. What Next “… Through the promotion of employee share ownership we firmly believe that EFI can play a central role in restoring competitiveness to the Irish economy. It is our intention to maintain this focus and ensure that the benefits of employee ownership and commitment align with Government strategy in navigating through these unprecedented economic times”ChairmanIrish ProShare Association
  28. 28. Dilution Trumpet• Deal with the dilution caused by funding rounds• Keep team motivated when scaling the business• Can “re-flate” with share options• The tax currently arising on exercising is twice that arising had the shares been directly owned
  29. 29. Membership• Open to all those interested in • LinkedIn group Employee Share Incentives - www.linkedin.com• Several classes • Website – Corporate membership - www.ipsa.ie • Membership Drive – Company/service provider – Need Members membership – Flexibility – Individual membership (academics and students) • More members the stronger the voice
  30. 30. Cormac Brown cbrown@mhc.ie Niall Kavanaghniall.kavanagh@elan.com