What is a share option agreement?
A share option agreement is a legally binding contract between a company (the holder of shares) and a third party, who is often an employee.
An agreement gives a third party an option, but not an obligation, to buy or sell company shares in the future. If the third party goes ahead and buys shares, they become a shareholder.
How do employee share schemes work?
Most of the time, a share option agreement will specify that an employee must work for a company for a set amount of time before they can acquire shares. Sometimes the right to purchase is triggered by an event in the business rather than an anniversary of service.
Share option agreements usually contain clauses that stop employees from selling or transferring shares to others. There are normally provisions in the agreement to prevent an employee who has committed misconduct from exercising their right to purchase shares at all. There may also be a clause stating that the right to purchase shares is removed if it is not exercised within a certain amount of time.
What type of share option schemes are there?
Parkinson Wright can assist you with the following share option schemes. Each one is an HMRC approved scheme with tax benefits, and they are free from Income Tax and National Insurance contributions.
Save as you Earn (SAYE)
This scheme tends to be a preferred option for large companies. It has two parts: a savings arrangement and a share option.
With the savings element, between £5 and £500 a month is deducted from an employee’s salary, which goes into savings over a 3-5 year period. When an employee enters into this arrangement, they are granted the option to buy shares at the end of the period, and they will also receive a tax-free bonus.
An employee can only use these savings to buy company shares. They cannot use any other money. If an employee decides not to exercise their option to buy shares, their money is paid back to them plus interest.
When an employee purchases shares, they can receive a discount of up to 20% of the market value of those shares.
An employer can decide to offer this scheme to those who have worked for the business for a certain period. However, the limit imposed cannot be over five years.
Company Share Option Plan (CSOP)
Any employee can be offered a CSOP, but it is usually only offered to senior staff members. A company can choose which employees receive a CSOP. This is different to the SAYE scheme, which must be offered to all eligible employees.
With a CSOP, the maximum value of shares an individual can hold under an unexercised option is £30,000.
A CSOP can specify when an option will lapse. This might be when an employee leaves the company (unless they have committed misconduct, in which case the option may be removed) or in the event of changes to the company, such as a takeover.
Enterprise Management Incentive (EMI)
The EMI scheme can only be used by smaller companies with fewer than 250 employees and a turnover of less than £30m. It has a greater level of flexibility than most schemes, and it is easy to put in place.
With this scheme, an employee has the option to acquire shares at a later date at a price agreed at the start of the option. An employee might be offered the chance to join an EMI scheme when they have reached a certain performance target.
Which scheme is best for your company?
Share schemes can usually be tailored to suit your company’s needs. The type of share scheme you choose depends upon whether:
- You would like to offer shares to employees who meet certain criteria or to all employees.
- You would like to offer shares to non-employees such as freelancers and contractors.
- You want a share option agreement to terminate when an employee leaves the company.
- You would like your company to have reached specific performance milestones before you release equity.
The size of your company and your company assets will also be deciding factors. For smaller companies, an EMI arrangement is normally best. Our solicitors can advise you on the best options for your business.
Why choose Parkinson Wright solicitors?
Share option agreements have many advantages, but they can be complicated to draft and administer. From deciding what to include in an agreement to making sure legal processes are followed, there is plenty to think about.
Our solicitors have the experience and expertise required to set up your share option agreement. We make the process as straightforward as possible by taking away legal jargon and clearly explaining your rights and obligations.
Parkinson Wright solicitors have a number of accreditations, so you can rest assured you will receive expert legal advice and the highest level of customer service.
Solicitors Regulation AuthorityRegulated and authorised by the Solicitors Regulation Authority (SRA).
Lexcel Quality MarkWe have achieved the Law Society’s Lexcel Legal Practice quality mark, which sets the standard for client care.
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