Share incentives protect intellectual property

Taking advantage of the commercial as well as the tax benefits arising for employees holding shares

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Share incentives protect intellectual property

Often your core intellectual property resides with a few employees who leave every night. We implemented a tax-advantageous arrangement to enable our client who ran a media talent agency to retain a key employee.

This is a specialist area for us, as it utilises our employment, corporate, share valuation and tax expertise.

How the award of shares can preserve intellectual property

Our client wanted to incentivise and retain a key employee. His role was to find media opportunities for the publishing and film industry.  He possessed significant technical know-how and contacts within the industry. Essentially our client needed to bolt him down to retain its competitive edge.

Our client knew equity incentives motivated and retained employees. Awarding equity incentives can make employees feel valued, and have some control over the company’s direction and growth.

Equity incentives also protect the company. Employees are less inclined to leave. Employees who leave not only take specialist technical knowledge acquired on the job, but also their, usually undocumented, knowledge of how to get things done using the company’s systems, processes and people.

Our client wanted advice on which equity incentive to offer and have that scheme implemented.

Employee Shareholder shares vs EMI share options

We discussed the many options with our client.

  • EMI options, the most common, were inappropriate. Our client wanted to award equity right now, rather than promising jam tomorrow.  In their view, this employee had done enough to immediately receive dividends.
  • Awarding  shares without any restrictions on the use of intellectual property such as contacts, the data base and trade secrets the director was privy to was not attractive commercially.  Plus the award of shares carries tax implications.
  • Our client chose Employee Shareholder shares which carry substantial tax benefits if the employee surrenders some employment rights, e.g statutory redundancy pay and unfair dismissal.  With Employee Shareholder Shares employees and directors can receive up to £2,000 worth of shares in their employer’s or employer’s parent company that are free of income tax and national insurance. The capital gains tax on sale is exempt up to £100,000 if their shares were worth less than £50,000 when acquired.

We agreed the unrestricted tax market value of the shares with HMRC. We then prepared the legal documentation to comply with the HMRC legislation.

Intellectual property protection and good/bad leaver provisions

Our client also wanted to protect its company’s intellectual property, by retaining this employee.  So, we drafted provisions covering the employee leaving the company. We create a formula for the share price based on the reason for his leaving:

  • If he chose to leave or was summarily dismissed he would receive nothing, as he would have to sell his shares to the company or other shareholders.
  • If  the company terminated his employment for reasons which would amount to a successful unfair dismissal claim then he would receive fair value for the shares.

Enforceability of restrictions placed on the shares

Post termination restrictions attaching to shares are generally easier to enforce and can be more far reaching than similar post termination restrictions included in employment agreements.  We advised our client that to take advantage of this rule changes were required to the shareholders’ agreement.

We drafted non competes for the shareholders’ agreement which meant that upon leaving the employee in his capacity as a former shareholder was restricted from setting up or joining a competing business, working with the company’s contacts and representing its clients directly or indirectly for two years.

Helen Curtis regularly advises businesses based in the UK and overseas on the implementation of employee share plans.  Helen has the skills to recommend the best ideas for companies at all stages of development from start up through to those nearing exit and businesses at the stages in between such as fund raising.