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If you’re offered shares to move firms, what do you need to know?

If you’re offered shares to move firms, what do you need to know?
Thursday, April 04, 2019

Many newer firms, in an attempt to lure the very best talent away from their current employer, are offering a shareholding in their companies as part of their employment package.

Introduced in 2013 as part of the Growth and Infrastructure Act, the “employee shareholder” introduced a new category of employment to the UK. A good but still imprecise way of describing an “employee shareholder” is a person who falls somewhere near the middle of an employee and a worker. If you are offered a new position as an employee shareholder, you’ll give up some statutory employment rights if you accept.

Your shares

You’ll give up some of your standard employment rights in exchange for £2,000 of shares at market value. These shares will be fully paid-up shares. The shares will also be treated as “restricted securities” which depresses their market value. Their value is depressed because you will not be able to sell your shares or only allowed to sell them to certain people for an agreed length of time.

During your negotiations, you will need to identify clearly the types of restrictions placed on the shares. That’s because these restrictions will affect how your shares are treated for tax purposes – you would be wise to speak with a chartered accountant who will provide you with the advice you need.

Panthera note – there used to be income tax and CGT benefit to employee shareholders but they were discontinued for new applicants from 1st December 2016.

Conditions of acceptance

In addition to the granting of £2,000 or more worth of shares (to which you as the employee shareholder cannot make any financial contribution), you must receive a written statement of your status and you must take advice (for which the company pays) from an independent expert or advocate on the terms of the agreement.

You may not accept a job as an employee shareholder within seven days of receiving the advice.

Sacrifices

You will have all your standard employment rights except for:

  • unfair dismissal rights (except where the dismissal is unfair, discriminatory, or for health and safety reasons)
  • statutory redundancy pay rights
  • being able to request flexible working after the 2-week period following a return from parental leave
  • rights to take time off for training (with some exceptions)

The shares

The shares you are given may or may not:

  • have voting rights,
  • entitle you to dividends,
  • entitle you to benefit from surplus asset distribution post-winding up,
  • be redeemable (and if so, at whose option),
  • impose specified restrictions on the transferability of shares, and
  • grant pre-emption rights.

Information on all of these factors must be clearly communicated to you in the written statement provided to you by your would-be employer. It must also provide the specific details on any drag-along or tag-alone rights.

Is employee shareholding an attractive option?

It depends on the eventual outcome of the negotiation you have with your would-be employer. Also important is whether the owners are looking for an exit within the next few years which would allow you to crystallise any profit made from your ownership of the shares.

Unfortunately, many of the previous and reasonably generous tax reliefs have been removed from new employee shareholders. The government intends to wind up the scheme but has provided no date for it just yet.

In conclusion, the three main questions to ask yourself about whether an employee shareholding is right for you are –

  • Is it worth giving up some of my employment rights?
  • If the company was sold in five years’ time, would the eventual potential value of my shareholding be an attractive enough prize for all my hard work because there is no guarantee a new owner would keep me on?
  • Are the people making the offer capable of running the type of business you’d want to be a part of?

Want to know more?

This is a complex area of taxation so we recommend that you call us on 01235 768 561 or email enquiries@pantheraaccounting.com. In addition, you should consult with a solicitor for advice on the legal ramifications of any contract you’re required to sign to join the scheme.

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