Table of Contents
- Confirming Advisor Employment Status
- Choosing an Unapproved Share Option Plan
- Obtaining Necessary Approvals
- Establishing Vesting and Exercise Terms
- Valuation and Tax Considerations
- Maintaining Compliance and Record-Keeping
- Handling Plan Termination or Advisor Departures
- Key Takeaways
- Frequently Asked Questions
As a business owner, you recognise the value of retaining top talent and aligning the interests of your advisors with the company’s long-term success. One way to achieve this is through a share option scheme, which offers equity-based incentives to your advisors. However, while approved employee share schemes like the enterprise management incentive (EMI) and company share option plan (CSOP) are restricted to employees, unapproved share options can be issued to non-employee advisors or consultants. This article explores key considerations when issuing unapproved share options to advisors.
Confirming Advisor Employment Status
Before issuing share options, accurately determine your advisors’ employment status. If they are self-employed, you cannot offer approved schemes like EMI or CSOP. Instead, you may explore unapproved share option plans as an alternative equity incentive. However, be cautious of misclassification risks, as improperly treating advisors as non-employees can lead to legal issues and potential tax liabilities. You should review factors such as their:
- contracts;
- working hours; and
- level of control over their own work.
Seek professional guidance if there is any ambiguity about their employment status.
Choosing an Unapproved Share Option Plan
For non-employee advisors, unapproved share option plans are the appropriate choice. While you cannot offer the advisor the same tax advantages that would apply under an approved scheme, unapproved plans offer more flexibility in plan design and eligibility.
To ensure alignment with your company’s goals and advisors’ incentives, you should carefully evaluate factors such as:
- vesting schedules;
- exercise periods; and
- potential dilution.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
Obtaining Necessary Approvals
While unapproved plans may not require HM Revenue and Customs approval, your company’s articles of association may stipulate procedures for issuing share options, such as board resolutions or shareholder approval. Failing to follow proper protocols could invalidate the scheme and expose the company to legal challenges. It is important that you review your governing documents and seek legal counsel to ensure compliance with approval processes. Additionally, consider obtaining advisor buy-in and consent to the plan terms to avoid potential disputes.
Establishing Vesting and Exercise Terms
Implement vesting schedules to align advisors’ incentives with long-term commitment. Vesting can be time-based, for example, a four-year vesting schedule where 25% of the options vest after the first year and the remaining 75% vest in equal instalments over the next three years, provided that the advisor continues to work for your company. Alternatively, vesting can be linked to KPIs such as sales targets or performance milestones.
Exercise periods determine when vested options can be exercised, ranging from as soon as they have vested to a certain number of months after leaving the company or when there is an exit event.
Thoughtful structuring protects against immediate share sales and encourages advisors to contribute to the company’s long-term growth. Additionally, consider including provisions for accelerated vesting or extension of exercise periods in certain circumstances, such as:
- a change of control;
- termination without cause; or
- achievement of specific company-wide performance milestones.
Valuation and Tax Considerations
Unlike approved schemes, unapproved share options may result in tax liabilities for advisors upon exercise or share disposal. You should consider consulting with tax advisors to understand potential implications and ensure compliance with reporting and withholding requirements.
Proper valuation of the share options at the time of grant is also crucial, as this impacts the potential tax liability for advisors when exercising their options. Engage professional valuation services to ensure accurate and defensible option pricing. Additionally, you may consider including valuation methodologies and assumptions in the plan documentation to avoid future disputes.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Maintaining Compliance and Record-Keeping
Maintain compliance by keeping accurate records of:
- option grants;
- vesting schedules;
- exercises; and
- share transfers.
Ensure proper tax reporting for any income realised by option holders. Review scheme rules periodically for legal and regulatory changes and updates to company policies or procedures that may impact the plan. Monitor corporate events that could affect the scheme, such as mergers, acquisitions, or restructurings, and make necessary adjustments to protect advisor interests. Regularly communicate with option holders regarding their rights, responsibilities, deadlines, and any updates or changes to the plan terms.
Handling Plan Termination or Advisor Departures
Establish clear policies for handling advisor departures or plan termination scenarios. This may include provisions for accelerated vesting or extension of exercise periods in certain circumstances and guidelines for determining the treatment of unvested options. Clearly define the circumstances under which options may be forfeited or repurchased by the company. Consider incorporating dispute resolution mechanisms, such as arbitration clauses, to address potential conflicts related to option treatment upon termination.
Key Takeaways
Issuing advisors share scheme options can incentivise and retain them while aligning interests with your company’s long-term success. Key steps include:
- accurately confirming advisors’ non-employee status to justify unapproved options;
- designing an unapproved plan tailored to your company’s needs and advisors’ incentives;
- obtaining necessary approvals per your company’s governing documents and advisor consent;
- structuring vesting schedules, exercise periods, and performance milestones to encourage long-term commitment;
- considering valuation methodologies and potential tax implications for advisors;
- maintaining meticulous compliance and record-keeping practices;
- regularly reviewing and communicating scheme terms and updates; and
- establishing clear policies for handling advisor departures and planning termination scenarios.
If you are issuing unapproved share options to advisors, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today on 0808 258 4780 or visit our membership page.
Frequently Asked Questions
Unapproved options allow you to incentivise non-employee advisors, as approved schemes are restricted to employees. While lacking tax benefits, they offer flexibility in plan design and eligibility to align advisors’ interests with long-term success.
Key steps include confirming non-employee status, tailoring the plan design, obtaining required approvals, structuring vesting/exercise terms, considering valuation and tax implications, maintaining compliance and records, and establishing policies for advisor departures.
Potential risks include misclassification risks, non-compliance risks leading to invalidation, inaccurate valuation impacting tax liabilities, tax reporting obligations, and excessive dilution if not planned carefully.
We appreciate your feedback – your submission has been successfully received.
