smallbusiness.co.uk: Helping your business think big

As your business grows, you may toy with the idea of offering a small number of shares to key employees to keep them attached to the business. This can motivate staff and offers them a stake in the business that they are working so hard to build.

This may sound straightforward, but problems can arise. For example, what happens if you receive an offer for your business that can’t be refused? Having to deal with each shareholder before negotiations can begin could take a long time and may deter potential buyers. So what can be done?

SmallBusiness.co.uk teamed up with Gemma Taaffe of Sherrards Solicitors to give you this beginner's guide to share schemes:

Planning ahead is key if you want to avoid potential complications. The easiest mistake is to have granted the shares to an employee without retaining control over the voting rights if you want to sell the company.

In that case, a potential bidder would have to deal with various minority shareholders in order to buy the company outright. Balancing the need to negotiate the deal in secret while keeping minority shareholders informed could be a headache.

Share schemes are becoming more and more popular as a result of the favourable tax treatment that is available for both the company and for the employees. The schemes usually favoured by business owners are those that tie employees to the future growth of the company by granting them the right to purchase shares in the future rather than at the outset.

In this way the employees and business owners alike can feel like the shares that have been granted have been earned, rather than handed out.

A good share scheme will be governed by a robust set of rules that will set out the conditions on which the shares are issued. Such rules might include:

• The date on which employee share option-holders will be entitled to buy their shares – this may be tied to a length of service condition or the condition that the employee meets certain medium or long-term performance targets.

• Employees might be given the option to buy shares in stages, to guard against them getting the maximum amount of shares at the outset and then ‘taking their foot off the pedal’.

• If you sell the company employee share option holders can be required to sell out to the favoured bidder – so long as they are offered the same price for each of their shares as the majority owner is offered for each of his. This ensures that the eventual buyer ends up with 100 per cent of the shares.

When it comes to share schemes, the bottom line is to think of these issues in advance and plan well ahead. By granting share options to your key employees, you can enjoy the benefits of a motivated workforce without jeopardising the sale of your company at a later date.

For more information on this area of law contact Gemma Taaffe (glt@sherrards.com).

Sherrards is regulated by the Law Society. The information in this article is correct at the time of publication. Every care is taken in the preparation of this article. However, no responsibility can be accepted for any person who acts on the basis of information contained in it. You are recommended to obtain specific advice in respect of individual cases.

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