A share option agreement is a legal contract that outlines the terms and conditions for granting employee share options to key employees. In the UK, the Enterprise Management Incentive (EMI) scheme is a popular way for small and medium-sized businesses to incentivize their employees by granting them the right to acquire shares in the company.
The EMI scheme was introduced in 2000 to help small and medium-sized businesses attract and retain key employees by offering tax-efficient share options. It allows qualifying companies to grant share options to employees with the potential to acquire up to £250,000 worth of shares (at the time of the grant) without triggering income tax or National Insurance contributions.
The share option agreement is a crucial component of the EMI scheme, as it sets out the terms and conditions under which the shares may be acquired by the employee. The agreement typically covers the following key elements:
Grant of options: This section of the agreement outlines how many options will be granted, what the exercise price will be, and the vesting period (i.e., the period of time over which the options will become exercisable).
Exercise of options: This section sets out the conditions that must be met before the employee can exercise their share options, such as achieving certain performance targets or remaining employed with the company for a certain period of time.
Restrictions: This section contains any restrictions on the transfer of the shares acquired through the share options, such as a requirement for the company`s approval before the shares can be sold.
Tax considerations: This section outlines the tax implications of the EMI scheme, including the potential for income tax and National Insurance contributions to be triggered if the conditions of the scheme are not met.
By having a clear and comprehensive share option agreement in place, companies can help ensure that their employees understand the terms and conditions of the EMI scheme and feel motivated to work towards achieving the company`s goals. Additionally, a well-drafted agreement can help minimize the risk of disputes arising between the company and its employees over the exercise of the share options or the ownership of the shares.
In summary, the EMI scheme provides small and medium-sized businesses with a tax-efficient way to incentivize their key employees through the granting of share options. A well-drafted share option agreement is essential to ensuring that the scheme operates smoothly and that both the company and its employees understand their rights and obligations.