In an ever moving industry, retaining key employees is crucial for technology companies. Offering a share scheme to these employees should help to encourage them to remain with your company. Last week, we set out the benefits of EMI share options and this week we set out some practical tips on structuring EMI schemes.
Aim of the EMI Share Options
Before you look to create EMI share options for your employees, you need to consider what the aim of the company is in offering these schemes. Some examples could be:
- To encourage staff to remain with the company especially if the company is a start-up and unable to pay full market value salaries;
- To reward existing staff, especially if the company is considering entering into an agreement to sell the shares to a third party; or
- To provide a longer term reward to employees by providing them shares to receive dividends.
The terms of the scheme will need to be tailored in order to meet the company’s commercial objectives.
The Structure of EMI Share Options
The majority of the terms in an EMI share option are required for legal and/or tax reasons and it is usual for terms to be included within the agreement that deal with what happens if the employee should leave the company. Typically they automatically lose their options but it is common to have ‘good leaver’ and ‘bad leaver’ circumstances that have different economic results for the employee.
In addition to the more standard terms highlighted above, a company can choose to insert conditions into the document that must be met before any option over shares can be exercised. Those conditions can be used to encourage employees to meet key targets of the company and tailored to a particular employee’s role to enhance the overall performance of the company. For example, EMI share options for the finance director may include a condition that the company turnover increases to £1,000,000.
It is common for companies to want to restructure, often putting in place a new holdco in the US as part of their growth strategy to gain access to the US market and investors. It is important therefore that scheme rules facilitate the options being ‘flipped up’ to the holdco efficiently.
Equally important when structuring options is to look forward to how the options may be exercised on exit. Commonly employees do not have cash in hand to pay the exercise price to the company and it is an administrative hassle, so you will want to make sure you have well resolved mechanics that allow for the net issue of the options (so the exercise price is deducted from the sale proceeds of the shares sold to a prospective purchaser).
Circumstances can also change. A well drafted scheme should also build a clear process for an employer to amend the scheme rules – clearly any change to the material commercial terms should be considered carefully as to whether there is a need to notify HMRC of those changes and as to whether there are any employment law implications.
Generally speaking, the structure of the scheme should not be considered in isolation. The interaction with the company’s articles of association should be considered in particular – especially in the context of the rights attaching to those shares and whether there are leaver provisions in the articles that either should or should not apply to option holders once their options are exercised.
Exercise of the EMI Share Options
As with the structure of the EMI share options, the company can choose when any EMI share
options are available to be exercised. Some common timescales for exercise include:
- available immediately;
- available in a set number of years;
- 25% available in one year, a further 25% in two years, up to all shares available in four years; or
- available for exercise only on the occurrence of an exit event e.g the sale of the company, its business, or a listing of its shares on a stock exchange so the employee can join in and profit from the exit event.
Before you start to set up EMI share options, you should ensure you have considered the requirements of the company in the above three areas, as this will help to ensure the option meets its needs.
If you are considering setting up an EMI option, or have any questions, feel free to get in touch with an expert by contacting Angus Bauer, Partner at Ashfords LLP at firstname.lastname@example.org.
Next week, we look at what alternatives are available to EMI share options and will round off in two weeks’ time with what to look out for on an exit.
Article produced in partnership with Angus Bauer and Rory Suggett at Ashfords.