Your business is growing, and you wish to take on some exciting new employees. They have the skills, expertise and innovation to help you achieve your vision for your product or service. As a founder of your business, then you can offer equity to these employees to incentivise them to work hard and stay with you for the long haul.
One way to do this is by issuing your employees shares in your business. These types of shares can be part of an employee share scheme or can also be ‘vesting shares.’ So what is the difference? This article will explain the legal considerations that exist when you offer shares to employees.
Employee Share Scheme
An Employee Share Scheme is where a company provides its employees with an interest in the company. This can be shares, securities or options. An option is a right to buy a share at a future date. The Scheme will usually offer employees the interests at a discounted rate than they would to the public. Employees offered these types of schemes are generally high-quality staff that will be incentivised to continue working for you once they have a financial stake in your business and a real desire to help it succeed. New tax rules apply to Employee Share Schemes as of 1 July 2015, so it is important to get financial advice to make sure you are complying with your tax obligations in implementing your chosen scheme.
Vesting shares are usually the type of shares that will be issued to your employee as part of an Employee Share Scheme. They also might be issued to your co-founders or individual key personnel as a separate Share Vesting Agreement.
This agreement will set out what type of shares the employee will receive, e.g. ordinary or preference shares and what rights will be attached to the shares. It will provide information on what happens when an employee leaves the business, whether as part of retirement after a long period of service (a good leaver event) or after being asked to leave (a bad leaver event). Generally the shares will be vested over time to prevent a new employee from ceasing employment after a short period and retaining a stake in your company.
A vesting schedule will be included in the agreement, which sets out exactly when the employee will receive their percentage of shares. For example, if Ryan works for your business for one year, he will receive his first ten shares. After his second year, he will receive another ten, and so on into his third year of employment.
Another way of doing it is to use what is called a ‘vesting cliff’. This means that for the first year, Ryan won’t have any of his shares vested. After he has been working for you for one year he will have 25% of his shares vested, meaning he will receive 25% of the shares he was promised in his vesting agreement. Following this, he might continue receiving 25% more each year until all of his shares are fully vested after Ryan has worked for you for at least four years. You could also have Ryan’s shares vested monthly after the one year cliff or every six months. The way you would like to have your vesting schedule work depends entirely on your business model and what would work best for your company.
If you need help in drafting your employee share scheme or need advice on Share Vesting Agreements, contact one of our specialist corporate lawyers at LegalVision today.