Jargon Buster! A beginner’s glossary of share plan words
If you’re new to share plans, you’re probably going to be coming up against some pretty horrible jargon.
Here’s a quick and dirty guide to some of the terms you’ll come across at the outset of your employee share plan journey – what they mean and – just as importantly – what they don’t mean!
Company Share Option Plan (“CSOP”): a Discretionary Share Option plan that is Tax Advantaged. Available for independent companies of any size carrying out any trade.
Deferred Share Purchase Plan (“DSPP”): a Non-Tax Advantaged share plan that allows employees to buy shares but pay for them at a later date. This can help with affordability for shares that are already valuable. The plan also delivers tax efficiency for participants.
Dilution: this refers to how the original founder’s percentage shareholding can be reduced when an employee share plan is set up. The founder might start by being the only shareholder, with 100% of the shares – let’s say she owns 200 shares. If an employee is given 20 new shares, there will be 220 shares in issue, so the founder’s interest is now 200/220 shares – or about 91%. The employee’s interest is 20/220, or around 9%. See New Issue Shares.
Discretionary: description of a share plan that can be offered to one, some or all employees (unlike, for example, a SIP, which can only be offered to all employees). CSOP and EMI are both discretionary plans, which means the directors can decide how many options can be granted, and to whom. It’s important for directors to exercise this discretion sensibly and reasonably – for example, awards should not fall foul of any discrimination laws.
Employee: this sounds obvious, but it’s important to remember that an “employees’ share scheme” can only be offered to actual employees in a company. Usually, it will be clear who is an employee and who is not – e.g. a self-employed consultant. If you want a share plan for non-employees, you should usually set up a separate arrangement for them.
Employee Benefit Trust (“EBT”): a special trust that holds shares which can then be awarded to employees. Often the shares are awarded under a Tax Advantaged share plan. Sometimes EBTs can be used to buy and sell shares in private companies, acting as a market for the shares.
Employee Ownership Trust (“EOT”): a trust which enables a company to become owned by its employees with a sale of more than 50% of the shares in the company to the Trust. Often used as part of an exit or succession strategy.
Enterprise Management Incentive Plan (“EMI”): a popular, Discretionary Share Option plan that is Tax Advantaged. Available for independent companies with fewer than 250 employees, less than £30m gross assets, and that carry out certain trades.
Exercise: if an employee is Granted a Share Option, this gives them the right to buy a share in the future at a fixed price. This is called “exercising the option”.
Exercise Period: a set amount of time in which an employee is allowed to exercise their Share Option.
Exercise Price: the price that an employee must pay to “exercise” their Share Option and buy shares.
Exit-only Option: a Share Option that can only be exercised if there is an exit event for the company. Usually, this would be a sale of the company, but it might also be a flotation, or even the company being wound up. It is very common for private companies to grant Exit-only Options partly because it means there is no need for employees to hold shares directly. If they leave before the company is sold then their Share Options can lapse, which is easier than buying a share back from them.
Grant: when the company gives a Share Option to an employee. This is usually done by way of an option agreement, option deed or option certificate. Sometimes the employee must sign to accept the Grant of the Share Option; sometimes the Share Option is simply granted by the Company (though the employee can decide not to accept it).
Growth Share Plan: a Non Tax Advantaged share plan that uses a particular Share Class. Employees with Growth Shares will usually only benefit if the company is sold, and they will only get sale proceeds over a certain fixed amount. Growth Shares are often used to protect existing value for founders or other shareholders. They are also a way of making shares affordable for employees, and are tax efficient.
Hybrid Scheme / Hybrid Model: this term is used to describe a share plan which is established for a company which has transitioned to employee ownership using an EOT. It is often set up to incentivise key personnel whilst a vendor’s debt is being repaid.
Lapse: the point at which the employee’s right to exercise a Share Option is removed. This might be because the employee has ceased employment, or because the Exercise Period has ended and the employee has not yet exercised the Share Option. One advantage of using a Share Option is that lapsing an option is much easier than, for example, having to buy a share back from an employee who has left.
New issue shares: companies will have a certain number of shares already owned by shareholders – these are called “issued shares”. When an employee share plan is set up, the existing shareholders don’t usually transfer their existing shares to employees; instead, the company creates, and issues, new shares. See Dilution.
Non Tax Advantaged Share Options: a Share Option that is very flexible but does not carry tax advantages like EMI and CSOP.
Non Tax Advantaged share plans: any kind of share plan arrangement that is not formally set out in tax legislation or recognised by HM Revenue & Customs. Although these plans don’t benefit from specific tax breaks, they can often be structured to create tax efficiency for participants. Alternatively, because they don’t deliver any tax advantages, they can offer greater flexibility for companies than the formal Tax Advantaged share plans. Examples include Growth Share Plans, Deferred Share Purchase Plans and Non Tax Advantaged Share Options.
Share Classes: companies can create different share classes with different rights. For example, the founders of the company might have “ordinary shares” with all the share rights noted above. But they could create a new class of shares – for example, “B Shares” – for employees that have different rights. For example, B Shares might not have any voting rights, or they might receive dividends that are paid at a different rate from the ordinary shares.
Share Option: a share option is the right to buy a share in the future, but at a fixed price, which is called the “exercise price”. Options aren’t shares so they don’t carry any share rights such as votes or dividends. Employees must pay the exercise price in order to buy the shares.
Share rights: the ownership of every company is divided up into shares. There might be one share owned by the founder, or there might be thousands, owned by many shareholders. Shares will usually carry rights to vote, rights to dividends and rights to the proceeds if the company is sold or wound up.
Share Incentive Plan (“SIP”): a Tax Advantaged share plan that involves shares rather than share options. This means that employees can benefit from dividends on their shares. SIP must be made available to all employees. Available for independent companies of any size carrying out any trade.
Tax Advantaged share plans: this could be any one of a number of share plan arrangements that are formally set out in tax legislation, recognised by HM Revenue & Customs, and given specific beneficial tax treatment. The main Tax Advantaged share plans used by private companies are Enterprise Management Incentives (EMI), Company Share Option Plan (CSOP) and Share Incentive Plan (SIP). To benefit from these plans, companies have to meet certain requirements and follow certain rules.
Vest: this word can have different meanings, but usually it refers to the point at which an employee has an absolute right to exercise their Share Option and become a shareholder. This might be because they’ve achieved a certain performance target. Note that just because a Share Option has Vested does not necessarily mean the employee has to exercise it – they might just keep the Share Option and exercise it at a later date.
Vesting Conditions: a target, or a time period, attached to a Share Option which must be met before the employee can exercise the Share Option and buy the shares. Vesting Conditions might be time-based – e.g. the employee can only exercise after 3 years; or they might be based on performance conditions – e.g. the employee can only exercise if the company has increased turnover by 30%.
If you would like to speak to us on how any of these terms fit with your share plan requirements contact us at enquiries@rm2.co.uk and we would be happy to arrange to speak with you.
