Legal guide to employee options and share schemes

Practical steps when setting up employee share options and schemes

• Choose the right type of scheme - there are 3 main types of employee share schemes: employee share ownership plans (ESOPs), share incentive plans (SIPs), and share purchase plans (SPPs). 
• Design the scheme - to meet its objectives and to ensure that it complies with all applicable laws and regulations.
• Market the scheme - to ensure employees are aware of the benefits of participating in the scheme.
• Administer the scheme -appoint an administrator to be responsible for managing the scheme, including issuing shares, collecting payments, and keeping records.

Legal work involved

There are a number of legal requirements that must be complied with when setting up employee share options and schemes in the UK. This includes:

• Obtaining shareholder approval: The company must obtain shareholder approval for the scheme before it can be implemented. This is typically done by a special resolution, which requires a majority of the votes cast by shareholders.
• Drafting and registering the scheme document: The company must draft and register a scheme document, which sets out the terms of the scheme. T
• Obtaining tax clearance: The company must obtain tax clearance from HMRC before the scheme can be implemented. This is to ensure that the scheme complies with tax law.
• Providing information to employees: The company must provide employees with information about the scheme, including the terms of the scheme and the risks involved.

Risks for employees

• Illiquidity - employees may end up locked in, with their shares not readily available to sell..
• Company performance - the value of shares will depend on the performance of the company, and employees could lose money if the company performs poorly and they have already bought shares.
• Capital gains tax - Employees may be liable to pay capital gains tax when they sell their shares.
• Income tax: Employees may be liable to pay income tax on the value of shares that are granted to them under a share option scheme.
• Bad leaver penalties - One of the most common risks for employees is that they will forfeit their unvested shares if they leave their job before the vesting period is over.or the sale proce of shares already bought may be lowered by leaver provisions. Reasons might include being dismissed for misconduct, resigning without giving proper notice, or taking a job with a competitor.
• Dilution - Leaver provisions can also dilute the ownership of existing shareholders. This is because the company will issue new shares to the departing employee in exchange for their unvested shares. This can reduce the proportion of the company that each existing shareholder owns.

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