Understanding Employee Share Schemes.
If your employer has offered you shares in the company, you might feel flattered and excited. Employee share schemes are commonly used to attract, retain, and incentivise key employees who contribute significantly to the growth and success of the business. However, before you sign anything, it's essential to fully understand what you are agreeing to. Here's what you need to know.
What is Being Offered?
Employee share schemes can be structured in different ways, typically involving either shares in the company or options to purchase shares.
Shares
By accepting shares, you gain ownership in the company. Each shareholder owns a portion of the company in proportion to the number of shares they hold. Shares can be offered with various rights. Usually shares will entitle you to have a portion of the profits of the company when it is distributed. Sometimes shareholders will also have the right to be a part of the decision-making for the business.
Options
With options, you are granted the right to purchase shares at a future date. There will be rules setting out how the shares will vest in the future. This can include a condition that you must remain an employee for a certain number of years or that you must meet a target to be able to exercise your right to purchase shares.
Understanding whether you are being offered shares or options—or both—is the first step in making an informed decision.
Key Considerations Before Accepting
Before accepting shares in your employer's company, several critical factors need to be considered.
Ownership Structure
- Legal Ownership: If you have legal ownership of the shares, your name will appear on the Companies Office Register as the owner of the shares.
- Beneficial Ownership: In some cases, a trust or a subsidiary company may hold the shares on behalf of the employees. This often happens when shares are offered to multiple employees. In such scenarios, the trust or subsidiary is listed as the owner, and an agreement dictates how the shares are managed and what rights each employee has.
Purchase Price
- How is this calculated – is it the market value of the shares, or a nominal value? It is important to take accounting advice on the transaction, and on this aspect in particular.
Payment Of Purchase Price
- Are you paying the purchase price upfront, or will there be a payment plan?
Conditions Attached to the Offer
- Is the offer of shares subject to any conditions? As previously mentioned, options are usually offered with certain conditions such as meeting a target or staying an employee for a certain amount of time.
Due Diligence
- Ensure to do your due diligence on the company – even if you have been working there for a long time.
Review the Shareholders Agreement
Amongst the paperwork given, there will be (or should be) a Shareholders Agreement setting out the rights and obligations of the shareholders. This agreement should be carefully reviewed by your lawyer and accountant.
Pay close attention to
- Limited Rights: Employee shares often come with limited rights compared to other shareholders.
- Warranties: Warranties provided by the company may be limited, meaning you might not be informed of potential risks, such as pending litigation.
- Employment Conditions: Often, employees must remain with the company to keep their shares.
- Exit Provisions: Understand how your shares will be valued if you leave the company or need to exit the share scheme for other reasons.
- Funding: If the company needs funding in the future, what are your options if the company calls on its shareholders to advance funds?
While employee share schemes can be an excellent way to align your interests with those of the company, they come with complexities that require careful consideration. Always seek professional advice before accepting any offer to ensure that you fully understand your rights, obligations, and the potential risks involved.
If you feel you could use some specialist advice, don’t hesitate to contact the Commercial Team.