Issuing Shares to Key Employee

Headhunted

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A client came to me last week and told me that a key employee of his company had been headhunted.   To retain him, he'd given him a payrise and promised him a holding in the company's shares - 1% next December then 1% every year until he reaches 5%.  No payment required from the employee and the shares will be forfeit without compensation if he leaves his employment.  Currently there are 1200 shares in issue, held 51:49 by Mr Director and his wife, Mrs Director.  Net assets at the last balance sheet date were around £110,000 implying a share value of £90ish, before thinking about any goodwill.

I asked a few questions - his replies in italics.

Is this for definite ?  Yes. Why?

Did you not think of asking me first ?  No. Why ?

Is it just going to be this employee or will there be others ?  Dunno.  Probably not.

Are these going to be new shares or are you transferring some of your own ?  Hadn't thought about it. 

Do you want to keep a 51% control ? Hadn't thought about it.  I suppose so.

Who's going to pay the tax on the shares ?  Tax ?  Will there be tax on these shares ?

How will you get the shares back if he leaves ? Dunno. Hadn't thought about it.

In a way, I suppose it's nice to have such a blank canvas.  At its most straightforward, I suppose I could arrange for 12 of Mrs Director's shares to be transferred to the employee every year  but I'd welcome any thoughts anyone else might have.

Replies (17)

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By bernard michael
31st Dec 2018 13:25

Will you pay my fees for sorting the mess? --Dunno

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By WhichTyler
31st Dec 2018 16:26

I'd suggest he goes away and discusses it with the lawyer who will draw up the shareholders agreement and any changes to the employees contract and comes back when he has thought about it a bit more. Then you and the lawyer and he meet to discuss the options.

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By Matrix
31st Dec 2018 16:42

Yes transfer her shares (maybe redesignate first as A/B shares depending on what has been agreed).

They will be employment related securities however they are transferred/issued etc.

He should get a lawyer to draft the shareholder agreement and the terms for leaving (valuation for good leaver/bad leaver).

Even better, start at the beginning and look at employee share schemes.

Other issues are s431 election, potential use of alphabet shares/different dividend rights, valuation for the ERS submission, income tax on this value and ensuring both take their own legal advice.

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Replying to Matrix:
RLI
By lionofludesch
31st Dec 2018 17:45

Yes, I've looked at employee share schemes. Share Incentive Plans look a good option but I'm not sure if the requirement to forfeit the shares would be fatal.

One of the problems is that we're talking about small amounts. At the most optimistic estimate of goodwill, we're probably talking about share tranches worth £2000 tops per year for five years.

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By Tax Dragon
31st Dec 2018 18:02

Why does the employee think this is such a big reward? Give me the £2,000 any day of the week.

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paddle steamer
By DJKL
31st Dec 2018 18:06

Go back to employer (and employee )and suggest employee might be happier with a bigger pay rise-jam today- and a bonus scheme based upon business performance.

Unless the shares are going to vastly escalate and there will likely be a profitable exit route in the future seems a lot of effort, and fees, for an illusion of participation.

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Replying to DJKL:
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By Tax Dragon
31st Dec 2018 18:48

Clearly it's the golden handcuff element that attracts the employer. EMI? "Management incentives" sounds quite important, if that's what this employee values. Vest in 5 years, lapse otherwise, meets employer objectives too?

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Replying to Tax Dragon:
paddle steamer
By DJKL
31st Dec 2018 19:09

Is it really enough value to retain employee would be my question?

The fact is , or maybe this is just me. £1,000, £2,000 ,,,,,£5,000 accruing per year would not hold me anywhere if I did not want to be there/had other opportunities that I perceived were better, £10,000 upward per year accruing might have me thinking but £2,000 p.a. really would not cut it.

These are handcuffs with weak links.

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Replying to DJKL:
RLI
By lionofludesch
01st Jan 2019 10:38

Looking ahead, I believe there may well be a good chance of a decent exit outcome - but it's likely to be 20 years down the line at least.

There will also be dividend entitlement in the meantime. I'd rather it was paid as a bonus but I can see the attraction for the employee of the lower taxation on dividends.

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By SteveHa
31st Dec 2018 19:23

How will the employee feel about it all when he gets a CGT bill just for leaving his job?

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By Manchester_man
01st Jan 2019 08:07

I think a lot of the time these employee share ideas that clients have are really just an illusion of grandeur. As already stated, usually the value to be gained is negligible, particularly where the shares are restricted.

I have a client who wants to give his key employee 5% shares. He is convinced that this is a huge privilege and that the employee will be loyal / harder working as a result. The fact is, the shares in this particular client's company are worthless. To the client they're not though, and the employees rarely understand the finer details, and so it goes on. All we can do is advise I suppose.

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Replying to Manchester_man:
RLI
By lionofludesch
01st Jan 2019 10:33

Fair comment - and I don't want to give the impression that I think that this is a good idea - on several levels.

In fact, any ideas that I can put forward to demonstrate that this is a bad idea for all parties would be welcome.

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Replying to lionofludesch:
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By supremetwo
02nd Jan 2019 18:46

Quote:
Fair comment - and I don't want to give the impression that I think that this is a good idea - on several levels.
In fact, any ideas that I can put forward to demonstrate that this is a bad idea for all parties would be welcome.

Short-sighted to say the least.

One family company I deal with had a key employee who wanted shares.

His request was denied and 6 month's later, he left and joined another company and got shares.

2 years later, the other company has picked up a significant amount of the business of the original and is well ahead in growth. The original company has had to lay-off employees to avoid going bust.

The moral is never underestimate the value of a top-class employee and the significant impetus for that employee to pull out all the stops to increase the value of his own shares.

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the sea otter
By memyself-eye
01st Jan 2019 12:15

One negative might be...

"what if the employee dies owning 5% and the shares pass to an unknown third party?"

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Replying to memyself-eye:
RLI
By lionofludesch
01st Jan 2019 12:29

Nice one. Although the declared intention is that the employee hands them back if he leaves.

Admittedly, it was getting another job which was the scenario envisaged here, as opposed to being run over by a bus.

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7om
By Tom 7000
02nd Jan 2019 12:09

explain theres tax

tell him the employee will have to pay... the employee wont like that and want something different

explain theres share options he can have instead and skip the tax and you can put an expiry date on them

charge him £1200 for digging him out of the mess he created.

Win win - theres no problems... just solutions you can charge for :)

happy new year - my cut is 1%. ;) Sent in liquid form

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Replying to Tom 7000:
By SteveHa
02nd Jan 2019 12:20

Tom 7000 wrote:

happy new year - my cut is 1%. ;) Sent in liquid form

As in beer or spirits?

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