The clocks have changed, Black Friday is just around the corner, and so the countdown to Christmas has officially begun. Is it time for you to start thinking about how you might be able to say thank you to your hardworking staff members at the end of a busy year, and how you can best incentivise them to come back to work in 2024 with a fresh sense of enthusiasm?

There is no doubt that the last couple of years have been hard-going financially for many start-ups and young companies, and so the traditional Christmas cash bonus for staff is possibly not something your company can offer this year. But letting your team know that their contribution to your business is valued is all the more important in this climate as is incentivising them to continue to deliver the performance and customer service you need. January tends to be a popular time for employees to start to get itchy feet at work and to think about life changes, so it really is a good time to let those who are integral to the success of your business know that you appreciate their input.

Whilst cash bonuses may not be a possibility, establishing an employee share option plan and granting share options to staff may well be. As well as incentivising your team, this form of employee incentive model might well transform your business, encouraging and motivating everyone to pull the business in the same direction and just that little bit harder.

Employee share options are a contractual arrangement between a company and a staff member that entitle the staff member, at a specified point in time in the future, to an issue of shares in the company. An option price will be set at the time that the option is granted (usually set at a discount to open market value per share for EMI options, see more below). No cash consideration requires to pass at the time that the option is granted and many companies opt for ‘exit only’ options which mean that the options may only be exercised in the event of an exit (for example a share sale, asset sale, listing). Using a cashless exercise mechanism, the option price payable by the staff member will be offset from any cash proceeds of the exit which would be due to go to them on sale of their shares in such an exit. This means that the staff member does not need to personally fund the purchase of the shares over which the options are granted. Options can be hugely motivating for staff members who are incentivised to work with the company towards a mutual goal, with the potential for significant money to be made on an exit.

The UK government has recognised the benefit of this tool in enabling small companies to attract and retain employees specifically and continues to offer tax schemes which make share options an even more attractive prospect. The most prevalent of these for eligible companies with eligible UK-based employees is the Enterprise Management Incentive (EMI) scheme, which has actually been around for more than twenty years. The tax benefits of EMI can be huge, with both income tax/NIC and capital gains tax savings available.

So why do companies need to start thinking about this now? Well, designing and implementing your employee share option scheme should be considered carefully to ensure it works for you and your company now and will work for you and your company in the future. Arranging an initial meeting with the team here at MBM to design a scheme that is right for your company is the first step. Our lawyers and tax advisers will talk you through all the matters you will want to consider – whether the options should vest incrementally over time, whether it would be worth considering performance hurdles that will need to be met for options to vest, what happens when the option holder leaves the company, and when the options can be exercised.

Our legal team will work closely with our tax advisers here at MBM to take you through both legal and tax considerations, and that the best possible scheme for your company is carefully planned.

Christmas can be a busy time for the Employee Share Schemes Unit at HMRC, and so for those companies seeking HMRC clearances and valuations for EMI, the earlier you manage to submit your share valuation application the better.