How to incentivise staff
There are many ways a business can incentivise its employees, for example by paying bonuses and commissions. But if a company – let’s say a start-up - is strapped for cash, it can be worth considering incentivisation through share options instead.

Offering your people the opportunity to invest in the business not only creates personal ‘buy-in’ but can help recruitment and retention, particularly of senior employees. And, by giving such an incentive early in a company’s lifecycle, you can help motivate employees to stay when you need them most but when the salary you are paying may be lower than elsewhere.

Share options can also help align the interests of employees with shareholders, by ensuring that employees have an interest in the value of the company’s shares increasing or getting the company ready for sale.

What is an employee share option?
An employee share option is the right to buy (or sell) shares in a company at a predetermined price. Normally, this is the market value of the shares at the time the option is granted but sometimes it is less or greater than the market value at that time.

Companies often grant options using an option scheme with contractual rules that cover key features, including when the company can grant options, limits on the number of shares and any performance conditions or targets to be reached before the options can be exercised.

Deciding on the best option scheme or amount of equity to give away can be daunting. If you are concerned about relinquishing control of the company, you can make the options exercisable only immediately prior to a sale of the company. Options do not carry voting or dividend rights, which means that day-to-day control and voting rights will remain the same but with some equity being relinquished prior to a sale.

Retention of employees
There are several option schemes available to employees, some of which provide tax breaks when exercised. Options are usually non-transferable, so an employee is prevented from selling their option and they typically lapse when an individual leaves employment, which is key for retention.

If options are not exit-only, you should consider additional protections once the options become shares.

The shares could be subject to vesting, so they gradually become fully owned by the employee. If the employee decides to leave the company before all the shares are vested, then the unvested shares will not be issued.

If the options have been exercised and the employee holds shares, look to include a mechanism for shares to be returned if they leave. Employee shares could be subject to good and bad leaver provisions, whereby a ‘good leaver’ who leaves the company due to retirement or unfair dismissal may either retain or be paid market value for their shares. Conversely, if the employee is a ‘bad leaver’, leaving the company through resignation or gross misconduct, they will be paid only a nominal amount for their shares.

Rebecca Bennett, Senior Associate - Hill Dickinson.