What is the best type of share options?

Any share options scheme for employees is a great thing. Without stating the obvious, giving away a slice of your company, especially in start-ups and scale-ups is the simplest way to attract top talent, cultivate a great culture and ensure your talent remains motivated and retained. There are many different types of share options schemes available ranging from growth shares, phantom shares and ESOPs just to name a few. There are a number of considerations you need to think about when deciding which scheme is best for you and your employees. This depends on variables such as which country you operate in, how many employees you have and how much revenue you generate. There are some schemes which are more superior than others and in this post we explain the most common types of schemes and the strengths and pitfalls of each.

Before you jump the gun and start handing out employees options, equity or shares, it is important to consider why you actually want a share options scheme in the first place? Is it a tool intended to incentivise management? Maybe you can not pay salaries that traditional corporations can? Alternatively, maybe you actually want to create something that is simple for both you and your employees and doesn’t involve oodles of administration. Recruiting and retaining top talent is now more competitive than ever before, employee share schemes are the easiest way to sweeten the deal for potential recruits. Whatever your reason this guide should help you make your decision that little bit easier.

EMI

EMI Schemes are the preferred share options scheme in the UK for a number of reasons, the main ones being they are simple to set-up, super tax efficient for employees and flexible. There are a number of criteria you must meet to be eligible for an EMI scheme, such as your start-up has a permanent establishment in the UK, less than 250 employees work for your start-up and assets less than £30 million. For a start-up that is still relatively new, EMI schemes are the clear favourite. Employees benefit from very favourable tax treatment which can end up saving them thousands. If your start-up has been around for a number of years and is already quite big an EMI Scheme may not be suitable. We dive into all the details about EMI Schemes here if you are wanting to know more.

Phantom shares

Phantom shares are a financial instrument which gives employees the right to a cash based payment if the share price increases (amongst other conditions). This approach can be simple to set up and ensures a clean cap table but provides limited upside to employees. Employees do not get voting rights if they are issued phantom shares and there is no favourable tax treatment with this approach. With phantom shares, employees are not guaranteed any ownership and therefore it can be demotivating.

Shares

You can issue employees shares (or equity) straightaway. This means your employees are shareholders from the day they receive their agreement and they do not have to go through a vesting period. Giving employees shares does have some benefits such as alignment of interests from day 1. For certain hires, such as senior management or as an incentive to attract talent it may be necessary to offer them shares as part of their package. This option does have some risk attached to it. Making employees a shareholder straightaway means you have no protection against them being a bad hire. Giving an employee shares straightaway, is similar to giving an employee a whole cake on their first day (with no more cake across their employment). If there is no cake left to give away over their tenure it is pretty hard to ensure motivation is maintained.

Other schemes

There are a number of other option schemes which are available in the UK and other countries such as Employee Stock Ownership Plans (ESOPs), Share Incentive Plans (SIPs), Company Share Option Plans (CSOPs), Save As You Earn (SAYE) etc. Each of these schemes has subtle differences and quirks. At Pomelo we have learnt that the best ideas are often the simplest. Same goes with option schemes, there is a reason that EMI schemes are the most popular in the UK. If you are in the UK and thinking about another type of employee option scheme you may want to reconsider your options. If you are from another part of the world why don’t you message us and we can help you figure out the best scheme for you and your employees.

In the end, we believe that having no employee equity scheme is the worst option of them all. In the current climate the fight for talent is heating up and enticing employees with options or equity is a great sweetener. It will become more and more common for employees to receive this as part of their remuneration package. If you are wanting to understand more about which option scheme is right for you and your start-up, we would love to have a chat to see how we can help you.