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Share Options For Small Businesses

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Last editedJun 20212 min read

Your business would not be what it is today without your hard-working and dedicated team, and you know you can’t afford to take a single employee for granted. You also know that a competitive salary is an important piece of the puzzle, but is not your only weapon in the battle for employee retention. Unless you can keep employees motivated, enthusiastic and feeling as though their employer’s values are aligned with their own, you’ll risk losing their talents to your competitors.  

Providing employees with share options can be an effective way to attract and retain top-tier employees while also creating a sense of alignment in values and goals. Here’s how they work.

What are share options?

Share options give employees the right to buy shares in your company at some point in the future. A share option doesn’t give employees voting rights or pay dividends. Employees only gain these once they buy the shares that have been made available to them. There is no obligation for employees to buy shares. An option just means that the shares will be made available to them if they decide they want to buy. The price of these options (known as the exercise price) is set when the options are granted. This means that employees can keep checking the exercise price of their shares against their current market value and decide on the best time to exercise their options. 

There are different kinds of share option schemes. Some can be used by companies of any size, while others are designed specifically for smaller businesses. 

What are the advantages of share options?

Share options are a great way of ensuring that employees are motivated, and feel a sense of ownership over the company. They also ensure that employees’ interests are aligned with those of the company and its shareholders

They are especially advantageous for cash-strapped new startups that want to attract the best talent, but may not be able to offer the same remuneration as their larger counterparts (at least at first). 

Some share option schemes also carry certain tax advantages. Employees can exercise their options without having to worry about liability for income tax or National Insurance Contributions (NICS) as long as they meet certain conditions. 

UK-based employers will also generally qualify for corporation tax deductions that are equivalent to the gains realised by employees who choose to exercise their share options.

Companies and employees can benefit from all of the above if:

  • A company share option plan or EMI is established (more on those shortly)

  • Options are exercised within 10 years of the date they are granted

  • The person exercising the option is a current employee or exercised their option within six months of leaving

Options can also be exercised by an employee’s personal representatives within 12 months of their death.

Different types of share option schemes

Setting up a share option scheme requires approval from all shareholders, as options could potentially reduce their interest in the company. Clear terms will also need to be established in terms of who can access the scheme, whether options are transferable, exercise prices and periods, or what circumstances could lead to options being lost.

You’ll also need to decide on what kind of share options scheme is best suited to your company. Your available options will depend on the number of employees you have. The main schemes available to companies are:

  • Enterprise Management Incentives (EMIs) – these are available to companies with less than 250 employees and with gross assets not exceeding £30 million.  

  • Company Share Option Plan (CSOP) – this is available to companies of any size. 

  • Save As You Earn (SAYE) – this is only available to listed companies that are not under the control of any other larger company.

We can help

If you’re interested in finding out more about share options, or any other aspect of your business and its finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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