29 July 2022
How startups can use share schemes to attract and retain employees
Your team is one of the most important things you can invest in as a startup founder. Securing and retaining the right talent will give you a real edge as a new business and allow you to plan for growth.
Most startups are already up against it when it comes to finance and resources. Add the pressures of recruiting, onboarding and training new employees, and things can quickly turn from challenging to overwhelming.
There are lots of tactics that help with finding and holding onto the right employees, but not all are accessible to startups or scaleups keeping a tight grip on budget.
A share scheme is an incentive that companies of all ages and sizes can implement. With a share scheme, employees are offered equity and, in turn, financial benefits when the business does well.
Share schemes can be a great way to attract and retain talent for your startup. We outline some of the common challenges with startup recruitment, the benefits of share schemes and the options available.
Finding the right talent for your startup
Startups can have a tough time when looking for the right talent. You’re often competing against well-known and long-established companies for the attention of candidates.
Here are the three main barriers startups can face with recruitment.
Established businesses can offer higher salaries
New businesses can rarely match the salaries of brands that have been trading for decades. There may be fewer perks and resources too, in order to keep costs down in your first few years.
Lack of job security
Job security is another major concern for candidates considering roles at startups. Companies are precarious in their early stages, and even some of the most promising don’t end up making it work long term.
Understandably, potential hires may look for greater security when choosing where to work. This lack of security can impact existing staff too: your staff could start looking for new roles if funding rounds aren’t as successful as hoped or other financial issues occur.
A different culture to larger businesses
Startups tend to have a different kind of culture than long-standing businesses, too.
Some of these differences are positive: less red tape, more transparency and a smaller, more close-knit team, for starters. However, others might end up being deal-breakers.
Having to put in extra hours can be a relatively common occurrence, especially when your startup is going through a period of growth. Most startups will work with remote freelancers in its first few years too, which isn’t ideal for those who enjoy the social aspect of work.
The benefits of incentivising employees
Boosting your company’s appeal to potential employees and ensuring staff are in it for the long haul takes some effort – but it’s well worth it.
First and foremost, attracting the best talent in the industry will give you the edge over your competitors. It also helps to impress investors when you’re looking for funding. If the employees in question have come to you from other successful brands, they’ll bring with them valuable insights and experience that you might not otherwise have access to.
There are substantial cost savings to be had, too. Things like recruiting, training and lowered productivity from inexperienced staff will all put a dent in your finances. Keeping staff on a long-term basis gives you the chance to develop and refine processes, and work more efficiently.
Finally, the constant turnover of employees makes it difficult to create and maintain a positive company culture – something that’s especially important for startups. This can have a knock-on impact on morale, engagement and productivity.
How share schemes can help startups
Share schemes involve you awarding employees a certain amount of equity. They can benefit your business in lots of different ways, including attracting, engaging and retaining talent.
The main reason is because these schemes give your employees real skin in the game. By owning a stake in the company, they get a share of the rewards when it performs well – and said rewards usually have pretty favourable tax terms, too.
It also helps staff to feel like an integral part of the business. It gets them invested (in more ways than one), motivates them to perform and encourages them to stay long term.
Matt Perry, managing partner of Haines Watts, explained that employee priorities have shifted since the pandemic and that perks like share schemes are more pertinent than ever:
“I think people are realising that there's more to [job satisfaction] than just the salary. They want to be part of something – I think there's a bit more of a movement that way,” he said.
Share schemes are particularly useful tools for startups as the costs are relatively low, so they can be implemented even if you’re on a strict budget. They also promise a certain amount of flexibility, allowing you to set your own terms.
That said, Matt recommends getting professional help in setting yours up in the right way.
“You can come up with your own solutions, but if you want to put in classic Enterprise Management Incentive (EMI) share schemes, which is the type most people know and understand, you’re getting into territory where you need to speak to HMRC. You probably need a professional – there's a bit of work to be done around it and making sure it is tax efficient,” he said.
Types of share schemes
There are four main types of share scheme that are approved by HMRC (which means they come with tax advantages) and each works in a slightly different way.
EMIs are often considered the most beneficial, but they’re not available to all companies. It’s worth researching which scheme would suit your business the best.
Enterprise Management Incentives (EMIs)
The best-known type of share scheme out there, EMI schemes are well-suited to startups and small businesses. They’re only available to companies with less than £30 million of assets and a maximum of 250 staff.
You can dish out share options each worth up to £250,000, allowing employees to own a percentage of the company and the chance to receive capital.
EMIs also have the most tax advantages – any money that’s paid out is subject to a much lower tax rate than if it was added to their salary. EMIs are really flexible, so you can tailor them to suit your business by setting specific conditions such as eligibility criteria.
Companies operating in certain industries aren’t eligible for EMIs. These include banking,
farming and property development.
Company Share Option Plans (CSOPs)
The Company Share Option Plan gives employees the chance to buy shares in the company they work for, up to the value of £30,000. No income tax or National Insurance is payable on these shares or any profit gained from them (so long as they have been held for more than three years).
A CSOP is a discretionary scheme, meaning you can make it available to all employees or select specific individuals (top-level managers, for instance) to offer it to. That’s in opposition to some other share schemes, which are designed to be executed company-wide.
CSOPs are a good choice for your business if you’d ideally go for an EMI but aren’t eligible.
Share Incentive Plans (SIPs)
Share Incentive Plans are designed for awarding free or discounted equity to all of your company’s employees (not just a select few).
Staff also have the option to buy extra Partnership Shares, the value of which will come out of their salary before tax. To get optimum tax benefits from these shares, they can’t be withdrawn within the first three years.
Save As You Earn (SAYE)
Save As You Earn is another all-employee scheme. It works by offering staff discounted shares, priced up to 20% lower than their current market value. Then, a certain amount of their wages – up to £500 – is deducted each month over a three or five-year period and kept to one side.
At the end of the contracted period, the saved funds will be used to buy shares at the pre-agreed price.
If the market value has gone up during that time, there’s a monetary benefit which is subject to capital tax as opposed to income tax. With capital tax being lower and also carrying a £12,300 annual tax-free allowance, any gains to that value or less per year won’t be taxed at all.
Similarly, if an employee chooses to transfer their shares into their pension, the gains aren’t taxable.
If the value of the shares has gone down, they can take the cash back instead, making this a low-risk option for all parties.
Get expert advice on your startup’s share scheme
Implementing a share scheme can give your startup the edge when it comes to attracting and retaining all-important talent.
Ready to explore your options? The Pitch partner Haines Watts are experts in helping startups and scaleups set up share schemes and make sure they’re tax efficient. Find out how they could help your startup today.
