Share options and other management incentives

Common pitfalls & market practice

Implementing tax advantaged share plans: The “holy grail” of share incentive arrangements is the Enterprise Management Incentive (“EMI”) plan. However, EMI plans come with stringent qualifying criteria for both employees and the company. Where EMI options are not possible, either because the company or participants won’t qualify, the next “best” tax advantaged arrangements are CSOP options or growth shares/JSOPs.
Vesting schedules and leaver provisions: Implementing a vesting schedule and complementary good and bad leaver provisions which retain employees is fundamental. For VC-backed companies, whilst the standard model is a 4-year vesting period, with 25% vesting after a one-year cliff, with monthly vesting thereafter, consider if you either need to frontload or backload vesting, dependent on when employment commenced.
UK vs US vs Europe: the approach to what works from a tax perspective, and market standard, in each jurisdiction varies.

Incentive plan terms vary widely depending on the size and stage of a company – whilst EMI / CSOP options are appropriate for VC-backed companies, for later stage companies and PE-backed companies it is more typical to see growth shares or restricted shares and listed companies will typically implement nil cost conditional share awards or “RSUs”.
When it comes to share plans, Investors are most concerned about share dilution – ensure there is an option pool / dilution limit that is appropriate to the size and stage of the company, and provides enough headroom to incentivise your workforce.
Taxation of employment-related securities/options can be a sticking point on exit events – seek advice on all stages of the incentive plan (not just implementation and grant) to avoid unwanted surprises (i.e. income tax implications) on exit.

The Fair Share is a set of principles and operational recommendations for managing employee equity. This article outlines the goals and key principles of the charter, and how you can leverage it to guide your company's or client's equity strategy: https://carta.com/uk/en/blog/the-fair-share/
Also, please feel free to contact: Rebecca Servian (rservian@orrick.com)