Equity incentives for executives

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We work with companies who operate equity incentives awards for staff, particularly to executives.  We find that often senior employees or directors are offered the opportunity to invest in the company, typically through the grant of growth shares linked to hurdles set by the employer wishing to see growth in value of the underlying shares.   For smaller companies, the same effect can often by achieved via the flexible and tax efficient enterprise management incentives options (EMI).  We also work for individuals receiving equity incentives to explain what it all means and the risks.

In all cases what we are looking to secure via the issue of equity incentives is to take advantage of the more generous capital gains tax regime (compared with the rates of income tax and national insurance) when the shares are sold.

To help you decide if we could help you we have set out some recent cases where we worked with employers and the separate cases where we worked with senior executives.

Advising an employer who was considering offering equity incentives

When it comes to equity incentives there is quite a wide choice. We understand that employers can find such choice rather confusing.  So initially we took our client through a feasibility study to establish what could work for them.

Feasibility study on the provision of equity incentives to executives

We looked at the benefits and disadvantages of EMI options, growth shares and unapproved options to help arrive at the solution our client was looking for.  We explained the different tax treatment of the various types of equity incentives available and the tax reporting obligations both on the employer and employees following an award.

Growth shares

Growth shares or hurdle shares, for example, would be a better fit for incentivising more senior employees who would be involved in promoting the growth of the company, typically in anticipation of an exit.  The hurdles could be matched to hurdles imposed by investors into the company.

EMI options

EMI options generally work well for incentivising and keeping valued employees on. EMI options are affordable for employees and offer the company the flexibility to design what rights would be attached to the EMI shares once exercised.  We took our client through the exercise of checking that the employer and the employee met the qualifying conditions for EMI.  The conclusion reached was that the EMI qualifying conditions were met.

Outcome

The outcome was that our client decided that its objectives could be achieved by awarding EMI options.  The EMI options were granted on different terms to the executive team to reflect their individual contributions to the business.

Advising a director offered EMI options and growth shares

Our client was offered a combination of EMI options and growth shares and with a company sale planned within three years this meant a significant portion of the client remuneration would come from participating in the future growth of the company.

We reviewed the equity incentive documents including the articles and shareholders agreement.  This led us to challenge the drafting of the requirements to be satisfied under the growth shares.  We looked at the good and bad leaver provisions which were very tilted in the employers favour.  Concerns were raised over the provisions for valuing the shares in the event our client left employment before the sale of the business.

Outcome

We then set to improve our client’s position mainly around:

  • Negotiating less onerous leaver provisions – being a ‘good leaver’ or a ‘bad leaver’ will have a dramatic effect on the value attached to the shares (market value or deferred);
  • Vesting provisions; and
  • Who determines the market value of the shares and whether such valuation can be challenged.

With some help from us our client went onto agree much more favourable terms which left him feeling more in control.

  • I was delighted with the approach Gannons took to explaining the equity incentives and then focusing on areas to strengthen my position