Q:		Why should I consider extending share ownership to my staff?
Q:		My company is unquoted: how can employees sell their shares?
Q:		What additional administration will I be required to manage?
Q:		Will existing shareholdings in the Company be diluted?
Q:		What proportion of my Company's employees should participate?
Valuation Issues
Q:		What is the difference between a commercial valuation and a fiscal or open market valuation?
Q:		I plan to sell shares to an ESOP. Do I need an independent valuation?
Q:		I plan to grant options over un-issued shares. Do I need an independent valuation?
Q:		I plan to sell a 10% shareholding to an ESOP or directly to an employee. Will a discount be applied to the pro-rata value and if so how large will it be?
Q:		How can I limit the size of any discount when selling a small shareholding to an ESOP, to an employee or when granting share options?
Q:		How should the HM Revenue & Customs Shares Valuation Division be handled?
Q:		Why should I consider extending share ownership to my staff?
A:		There is strong evidence, based substantially on both UK and US research, that employee share ownership can significantly enhance productivity and profitability in companies where employees are encouraged to feel like part owners: The UK Employee Ownership Index shows that share prices of quoted companies with significant employee share ownership have outperformed all the main stock market indices over the last five years Equity participation is becoming the norm in an increasing number of industries, in particular those relying heavily on intellectual capital. In an increasingly global marketplace for talented people, you may need to offer world-class reasons for people to join your company and to match or surpass benefits offered by competitor employers, including the opportunity to become a shareholder If your company is young but ambitious, you may, because of limited cashflow, be unable to pay the high salaries demanded by the people you need to help grow the business. Equity pay can relieve pressure on your cashflow. Back to Top
Q:		My company is unquoted: how can employees sell their shares?
A:		This will depend on the circumstances. Like many private companies operating share plans, you could set up an Employees' Trust funded either by the Company or by a bank to buy shares from employees. Priority could be given to employees leaving the Company, and the Trust could be allowed to pay for shares in instalments. It is possible to produce a financial model predicting the rate at which employee shareholders may wish to sell and the financing requirements this will place on your Trust. Where the ability for employees to sell shares is considered important, your Company should take steps to engender employee confidence that they will be able to realise some of the value they have built up. This confidence will often, in practice, relieve pressure to sell. Many unquoted companies have a short to medium term goal of a sale to a third party or flotation. In that situation, we recommend that you launch your share incentive with this as a key objective for all participants as well as for existing shareholders. Back to Top
Q:		What additional administration will I be required to manage?
A:		This will depend on the type of plan and on how many employees are participating. For example, a share option plan in a smaller company, or which in any size company is extended to a small number of key employees, would involve marginal additional time spent on administration. A record would need to be kept of options granted, options exercised, and a short annual return form would need to be completed and sent to HM Revenue & Customs each year. If your company is larger, then administration requirements may increase according to the number of participants. If you operate a Save As You Earn share option plan, then the bank or building society acting as savings carrier may undertake all necessary administration at no, or limited, cost. If you create a share incentive plan involving a large number of employees and you wish to outsource administration of the plan, we can introduce you to a suitable specialist administrator. Back to Top
Q:		Will existing shareholdings in the Company be diluted?
A:		This depends on how an equity incentive plan is funded and on the source of shares. If participants pay full value for any shares they acquire, then the value of existing shareholdings is not diluted (although their percentage shareholding may be diluted if participants in the plan subscribe for new issue shares). Where participants receive free shares, or shares at a discounted price (for example, by exercising share options at a price that is less than the value of option shares), then existing shareholders will incur some dilution of their value, as well as of their percentage shareholding. However, if the share plan has achieved its objective of helping improve company performance, existing shareholders may be prepared to accept this dilution as the price of resulting enhancement in the value of their shares. Put simply, they would accept a smaller percentage of the cake if the whole cake increases in size. By setting company performance targets as a condition of participants receiving free or discounted shares, your company can ensure that this dilution will only take place if your existing shareholders enjoy a net overall benefit through enhanced company performance. Back to Top
Q:		What proportion of my Company's employees should participate?
A:		This will often depend on your business and your objectives. An equity incentive plan can be limited to directors, or extended to key staff, senior and middle management, or can be much more widely extended to be available to all or most employees. There are no legal or other constraints requiring shares to be offered to all employees, although most tax incentives for UK plans are now directed at those which involve broad employee share ownership. Back to Top
Q:		What is the difference between a commercial valuation and a fiscal or open market valuation?
A:		An open market valuation is a valuation for tax purposes. Such valuations are derived from legislation and case-law. It is the price that would be acceptable to a willing hypothetical purchaser and a willing hypothetical seller in a sale taking place in a hypothetical market. Unlike a commercial valuation, the identity of the purchaser and the seller is ignored. The information available to the hypothetical purchaser is not based on what the actual individual might know about the business but what a hypothetical purchaser would be expected to know. Generally, the greater the percentage of the share capital being acquired the greater the hypothetical purchaser's assumed level of knowledge. Open market valuations tend to heavily discount small shareholdings in a company, sometimes by as much as 90% of the pro-rata valuation. Back to Top
Q:		I plan to sell shares to an ESOP. Do I need an independent valuation?
A:		Yes, in most cases. Trust law places a fiduciary duty on trustees of ESOPs to act in the best interest of the beneficiaries. Trustees will want to feel confident that they have not overpaid for the shares. Trustees of a Qualifying Employee Share Ownership Trust are under a statutory obligation not to pay more than market value for the shares acquired. Back to Top
Q:		I plan to grant options over un-issued shares. Do I need an independent valuation?
A:		Not necessarily. With an approved Company Share Option Plan you will need to agree with the Shares and Assets Valuation Division of HM Revenue & Customs that the price at which options are to be granted is not manifestly less than market value. Although a detailed report is rarely required, you may need professional advice in handling discussions with HM Revenue & Customs. Back to Top
Q:		I plan to sell a 10% shareholding to an ESOP or directly to an employee. Will a discount be applied to the pro-rata value and if so how large will it be?
A:		A discount would normally be applied in these circumstances. The size of the discount depends on the circumstances. For instance, who holds the remainder of the shares in the company? Is there a market in the shares? Does the shareholding have any influence or rights built into the company's constitution? Does the company pay dividends? The discount can range from between 30% to 90% depending on the circumstances. Back to Top
Q:		How can I limit the size of any discount when selling a small shareholding to an ESOP, to an employee or when granting share options?
A:		This can be achieved in a number of ways. First, the company could issue a special class of shares to the ESOP or employee with special rights. For instance, the shares could be entitled to a minimum dividend or might rank ahead of other ordinary shares. Alternatively, the company's constitution could be amended to give shareholders holding a minimum shareholding additional rights, including greater rights to information. Another approach involves giving the ESOP or the employee a put option (a right to sell the shares back to the company or another shareholder). Demonstrating the existence of an active internal share market (generally more prevalent in companies with ESOPs) is another way of minimising the discount. Back to Top
Q:		How should the HM Revenue & Customs Shares and Assets Valuation Division be handled?
A:		Valuation is an art not a science. This means that there is plenty of scope for flexibility when seeking to agree a particular valuation but also the potential for complex and time consuming arguments should there be a disagreement. We always advise clients to think clearly about their objectives before an approach is made to the Shares and Assets Valuation Division. If you are setting up a share plan, a high valuation may be required to minimise dilution to existing shareholders. Equally, a low valuation may be sought to encourage employee participation or to mitigate tax. A detailed valuation report will not always be necessary. At the minimum, audited and management accounts should be provided and details of any recent transactions in the shares. The proposed valuation should be given - but leave room for any negotiations that may arise. On larger transactions a detailed valuation report might be justified. Generally, the staff at the Shares and Assets Valuation Division are helpful, knowledgeable and efficient. Valuations for employee share plans are normally turned around very quickly. Back to Top