Firstly, share option schemes are beneficial to both the shareholders and employees
- They are a great incentive to attract talent, retain and incentivise your current team.
- They give employees a stake in the future success of the business. This motivates them to work hard and stay with the company.
- They help with retention and incentivisation by setting vesting periods. This means that options only become exercisable after a certain number of years.
- Higher performance can be encouraged by setting performance criteria aligned to company goals.
- In summary, option schemes align the goals of the business owners with its employees, giving a mutual benefit from company growth and success.
Secondly, they are a tax efficient option
- For Employers: it’s a tax efficient way of giving financial rewards as they often result in lower payroll tax and NI when compared to salary and bonus payments.
- For Employees: certain schemes are tax efficient for the individuals: paying less tax on any gains made when they sell the shares, compared to their income tax rate.
Finally, there are other benefits including:
- Improved cash flow because share option schemes are easier on a company’s cash flow than a bonus payment. This is often vital for small or new businesses.
- A tailored solution as the details of a share option scheme can be adapted for each business depending on the goals and targets the owners have in mind. Vesting periods and targets can be completely unique.
- The creation of a positive culture because share options allow employees to be invested, they can create an ownership culture and team mentality.
- There is no immediate dilution because share options only dilute existing shareholders when they vest and the employee exercises the option. If that date is in the future then dilution is not immediate. Often, the dilution only occurs moments prior to a sale of the company.
So, in summary:
- the advantage of a share option is that they can be used to attract and retain employees and align the interests of employees and employers.
- All in a tax efficient manner and while preserving cash flow for the business.
- They are especially popular in start-ups and high-growth companies or those planning an exit.
If you are interested in exploring whether a share option is right for your business, then please do not hesitate to get in touch with our expert Corporate Law solicitors by email, or call +44(0)3333 231580.
