Share Schemes: Creating a market for company share plans

Using a share plan can be a great way for a company to motivate its employees, but for share incentive schemes to be effective, the participant needs to see a way of realising the value in the shares acquired. If not, the desired incentivisation effects can be lost.  

For private companies, there is no immediate market for the shares to be sold on in the future, especially when the company does not have a specific exit plan - so the company may need to create one when setting up the share plan. 

While companies can buy back shares from employee shareholders, this is often not the optimal solution from a tax perspective, and it can also be complicated from a legal perspective.  

However, there are potential solutions. 

Link the share plan to a future ‘exit’

The most obvious solution is to link the delivery of share incentives or other reward to an exit. If there is a likelihood of an exit event in the foreseeable future (i.e. a sale or a market listing) then the share incentive scheme could be linked to the company successfully achieving this event. 

An exit-based plan has the advantage that further minority shareholders are not introduced prior to an exit. In addition, with an exit-based plan there is no cash cost for the company, as the cost will effectively be borne by the shareholders by way of dilution. 

Using an employee benefit trust

An employee benefit trust (EBT) is a separate legal entity that can be used to create a market for shares in the company so that these can be bought and sold and without the need for an exit event such as a sale or listing of the company. 

EBTs are often operated in conjunction with a share incentive scheme by private companies, both to purchase shares from leavers and/or to act as a market maker.  

In addition to creating a market for share scheme participants, the creation of an EBT could be used to facilitate a partial or full exit for existing minority shareholders and can often also be used as a means of managing shareholder dilution The shares acquired by the EBT could then be ‘recycled’ and used to incentivise new members of the management team. 

When the participant wants to sell their shares and realise the value held, the EBT could then buy the shares with appropriate funding (either by way of loan or gift) from the company as required. The way in which the EBT is funded and operated can have significant tax implications and we recommend seeking professional tax advice in relation to the operation of an EBT.  

The employer can control the timing: participants could be offered the opportunity to sell their shares back from a specified date or when certain conditions are met or within certain specified windows for sale. To mitigate any company cost, employees who wish to buy shares can be matched with employees who wish to sell shares. 

Options could then be granted over more shares retained by the EBT or such shares could be awarded to eligible employees in the future, recycling the shares in the EBT and preventing further dilution for other shareholders. 

It is important to remember that an EBT holds shares and other assets for the benefit of employees and directors of a company. Therefore, any assets held by the EBT will be ‘ring fenced’ for the benefit of employees and cannot be reclaimed by the company. There is the option for the company to loan monies to the EBT rather than gifting the funds required to purchase shares from employees. In this way, it may be possible to ensure that assets are not then 'trapped’ in the EBT long-term. Should the company be subject to an exit event at some point in the future, the EBT would then receive consideration for the shares held within the EBT and this could then be used to repay the loan from the company.  

There are important considerations around funding EBTs, along with both corporation tax and inheritance tax issues which must be considered prior to implementation. 

Expert advice on Share Plans and Incentives

If you have any questions about creating a market, or any share plans for your business, please get in touch – our team of specialists will be happy to help you.

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