So, you've built up a successful business, which has grown and therefore necessitated bringing others on board to help you run it. Or perhaps you're nearing retirement, or simply wanting to slow down and let your management team take up the strain, whilst you take time to enjoy the fruits of many years hard work.
Of course, the problem here is how do you ensure that those key people, the one's you'll rely on to keep you business ticking, don't jump ship, or simply decide they could go and run their own business? Well, you could always give them a pay rise, or a bonus, but we all know that is only a short term incentive. How can you truly tie these 'employees' into your business? The answer is simple, give them ownership!
"Whoa, surely you don't mean give away my business?" I hear you cry. Well, you kind of have to, but not all of it, infact only a small part of it, and if you're careful about how you do it you will lose zero control and even only 'pay out' if the business is ever sold. No, I'm not talking about financial wizardry, or being less than honest with your people, I'm talking about share options, or more specifically the Enterprise Management Incentive (EMI) share options.
A share option gives someone the right to buy your company’s shares in the future, but at a price that is fixed now. This means in effect that you are giving away none of the business you have built to date, rather what you are giving away is an option to benefit from future growth. So, if your team do more than sail the same course, and they actually grow your business, then everyone wins!
Options are very useful for business owners that wish to incentivise and retain key employees because as I have already pointed out, if the value of the shares escalates over time those employees could make a significant capital sum when they sell their shares. An EMI share option scheme provides significant tax advantages to those employees (and you as their employer).
Quite simply, an EMI scheme is by far the most tax beneficial structure for staff, it was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.
The principal tax benefit of an EMI share option scheme is that employees do not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If you grant shares to an employee in other ways tax would be due on their value. It's also worthy of note that because of the advance agreement available on share values granted under EMI schemes, it is usual to agree discounts of up to 80% of the actual value, which further mitigates taxes.
If employees are given options under an approved EMI scheme, they are only charged capital gains tax at 10% on the increase in value over the option exercise price (what they pay for the shares), so long as that price is at or above the market valuation of the shares on the date of granting the options. This value is agreed in advance with HMRC as part of the process prior to entering into any agreement with the employee.
"All of this is well and good" I hear you say. Yes, it is very good news for your employees (or at least those key ones you want to incentivise).
"So what's in it for me?" you ask. The answer is simple, a team that now has an incentive to run your business well, after all they now have some ownership (albeit a small percentage) and their performance directly relates to their ultimate reward, which might be a business sale, or even a full management buy out. By giving them control of their own financial destiny, your own is assured as you step back from the day to day of running your business. Sounds nice doesn't it...
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