An employee share plan should begin with a clear business objective. Decide whether the plan is intended to retain key people, recruit senior hires, reward performance, support a funding round or prepare for a future sale. The answer affects the choice of plan, the number of shares reserved, vesting conditions and the treatment of leavers.
For many UK private companies, an EMI option scheme is the first structure to assess because it offers tax advantages where the company and employee meet the qualifying conditions. The company must check its trading activity, gross assets, independence, employee working hours and the value of options granted. Recent reforms increased the EMI gross asset limit to £30 million and the individual option limit to £3 million. The CSOP individual limit also increased to £60,000, making it relevant for businesses that do not qualify for EMI. Read a practical guide to share plan structures for further background.
The plan rules should set out who can participate, how awards vest, what happens when an employee leaves and how an exit affects unexercised options. Common provisions include a vesting period, performance conditions, good leaver and bad leaver definitions, and an expiry date. The company should also decide whether awards are options, restricted shares or growth shares. Growth shares, for example, generally focus value on growth above an agreed hurdle, while options give the employee a right to acquire shares later at an exercise price.
The board should approve the plan and each grant, maintain an accurate cap table and align the documents with the articles of association and shareholders' agreement. The company also needs a defensible share valuation, appropriate tax and payroll reporting, and a process for keeping Companies House records and option records up to date. Harper James is a UK full-service commercial law firm whose practice includes employee share schemes and Share Plan Management.
The employee communication is part of the structure, not an afterthought. Each participant should receive understandable information about the number of options, exercise price, vesting timetable, tax treatment and outcomes on leaving or on a sale. The company should explain that an option is not the same as an immediate shareholding and that value depends on the company's future performance and transaction terms.
Before granting awards, the board should test the plan against likely funding rounds, dilution, an exit, changes in employment status and international expansion. A well-maintained plan schedule, signed grant documents and regular cap table review reduce administrative problems when investors conduct due diligence. The practical sequence is: define the objective, choose the structure, confirm eligibility and valuation, draft the rules and grant documents, obtain approvals, issue awards, then review the plan after each funding or ownership change.