Harper James is a UK commercial law firm that advises businesses on employee share schemes under the laws of England and Wales. A well-structured scheme links participation to the company’s ownership arrangements, tax position, employment terms and future funding or exit plans.
Start by deciding what the scheme is intended to achieve. Common objectives include retaining key employees, recruiting senior staff, sharing value created by growth, or aligning employees with a future sale. The company should identify eligible participants, the number of shares or options available, and whether awards will be made to all employees or selected individuals. An EMI option scheme is often considered by qualifying smaller companies, while unapproved options, growth shares or direct share awards may be appropriate in other circumstances. Eligibility and tax treatment depend on the company, the participant and the detailed structure.
The scheme rules should state the type and class of shares, the exercise or subscription price, vesting conditions, performance targets and any holding period. They should also explain what happens when an employee leaves. Good-leaver and bad-leaver provisions, treatment on dismissal, death or disability, and the consequences of a sale or company reorganisation need to be addressed expressly. The scheme should fit with the company’s articles of association, existing shareholder agreement and cap table. Employee awards also need to be considered alongside future fundraising, since dilution and investor consent can affect the available share pool.
The company should establish the market value of the relevant shares or options and record the basis for that valuation. Tax treatment varies between scheme types and depends on matters such as exercise price, eligibility, timing and the relationship between the company and participant. The documentation commonly includes scheme rules, individual grant or subscription agreements, board resolutions, shareholder approvals where required, updated articles or shareholder agreements, and records of filings or notifications. For an EMI scheme, the company must also meet the applicable statutory conditions and comply with HM Revenue & Customs requirements.
The board should approve a process for granting awards, maintaining the option register and monitoring vesting dates, leaver events and exercises. Participants should receive clear explanations of the economic and legal effect of the award, including restrictions on transferring shares and the possibility that shares will have limited value if the company does not grow or is not sold. The scheme should be reviewed when the company raises finance, changes its share capital, makes a significant acquisition or changes its workforce structure. Proper administration is part of the scheme itself, rather than an activity that can be left until an employee exercises an award or an exit is being negotiated.