“Golden handcuffs and carrots.”
Have you ever considered what would happen if a key member of your team was offered a better deal and moved to pastures new? How would it affect your company? Probably badly. There are however, a number of ways you can reduce the risk of this happening. Employee share option schemes are one such method. Broadly, a company can offer a key team member an option to receive shares at an agreed value provided they remain with the company for a specific number of years.
Share options can be similarly used to motivate team members to reach certain performance targets. For example you could award shares on reaching certain milestones such as sales or profit targets.
Such schemes can also enable the gradual transfer of ownership of the business to those working in the business or to family members in an orderly and tax efficient manner.
There are a number of schemes available some of which are tax approved so that the employee does not pay income tax or national insurance on the shares. In addition, the costs of setting up the scheme can, in many circumstances, be offset against corporation tax.
“In sickness and in health”.
We have discussed ways to retain key team members but there are some things that remain in the hands of the Gods, namely critical illness and death.
Taking the example of a small company with 2 shareholders: Frank and Eddie. Frank and Eddie got along famously and ran a successful business until the grim reaper eventually caught up with Eddie. This left Frank with big problems in two respects. Frank did not get on with Eddie’s Wife (Mrs Eddie) who was set to inherit Eddie’s shares in the company. Whilst the business was successful, Frank could not afford to buy Mrs Eddie out but really did not want her involved in the Company and neither did Mrs Eddie for that matter! The problems were multiplied by the fact that Eddie was such a key person in the business he needed to be replaced otherwise the business would surely fail.
Frank’s problems could have been solved if they had visited QualitySolicitors Parkinson Wright and discussed a Shareholders Agreement that included what is known as a Cross Option. In essence, a cross option is where an insurance policy is taken out either by the shareholders or the company on the shareholders’ lives. The policy would have paid out on the death of Eddie to allow Frank to purchase Eddie’s shares or the company to buy back those shares.
We could have also discussed Key Man insurance which would have paid out to cover the costs to the business of losing Eddie’s skills and having to recruit a replacement.
Shareholders agreements can also cover many other points such as what happens if a shareholder wants to sell their shares, restrictions on competing against the business, voting rights and situations where the shareholders cannot agree on certain decisions.
QualitySolicitors Parkinson Wright can guide you through the process of setting up these essential safeguards. For an initial discussion contact Jeremy Redfern on 01905 726 789 or email jr@parkinsonwright.co.uk.