Have you ever wondered what makes or breaks a great share scheme? What options are available and what the tax and regulatory frameworks are? Here at Fuse we launched our own share options scheme and I had the exact same questions. So I got our CEO Russell and the founder of Vestd together to explain it in a little more detail.
Read on to find out what I learned.
Ifty explains that in short, if you have a stake in a business your relationship with it changes. What you bring to the table both psychologically and emotionally changes, and in a positive way.
With Russell's previous business they set up an EMI scheme for the management of the company before they exited. Russell found it a very difficult process having to deal with a complex legal framework. The irony is not lost on him that EMI was set up by Gordon Brown to help more businesses benefit from the ownership effect, yet the implementation was clunky and expensive.
Fast forward 10 years and you have Vestd, Russell liked the product as it took a lot of the complex legal frameworks and made it into a SaaS product. This made it easier to include everyone in the scheme and share the ownership effect.
That's a great question, Itfy explains that there are 2 main types of a share scheme. The difference is quite stark, as you can see here in this example.
| EMI | Unapproved | ||
| Exercise Price | £1.00 | Exercise Price | £1.00 |
| Sale Price | £10.00 | Sale Price | £10.00 |
| Gain | £9.00 | Gain | £9.00 |
| ER CGT @ 10% | £0.90 | Income Tax | £3.60 |
| @ Marginal rate to | £4.05 | ||
| NET to recipient | £8.10 | Net to recipient | £4.95 |
| The company can off-set whole £9 gain against corporation tax | NO off-set against corporation tax | ||
The difference between an EMI scheme and an unproved options scheme is quite stark. With an EMI scheme, the marginal tax rate is lower and you can offset the recipient gain against corporation tax. So a win-win.
But there are certain restrictions Ifty explains, EMI is only open to employees and not all UK SMEs are eligible. In short, if you are not in finance or property you are eligible. EMI is also only available to UK employees, so overseas staff will have to take unapproved options.
But it's not just about giving your colleagues options, you can link it to other performance KPIs. This helps to drive the right kinds of behaviour.
Join us next week for another instalment of THE POWER OF EQUITY where we explore how to drive the right kinds of behaviour with an EMI scheme.