Remuneration in shares

Remuneration in shares

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I 8 a 4RE

Original Poster:

137 posts

189 months

Wednesday 13th November
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Looking for experience in remuneration in shares when potentially going to work for a small company.

Specifically trying to figure out how receiving shares work for small start-ups / scale-ups vs shares paid in a bonus scheme for listed companies.

When working for listed corporates it is clear; part of your annual bonus will typically be paid in ‘shares’ of the company which will vest over a fixed period.
(I put ‘shares’ in brackets, because typically no shares are purchased, simply fictional amount based on share price on baseline date and adjusted per vesting anniversary; all in cash.)

Now the question is; how does this work with start-ups / scale-ups?
Do they issue actual shares (or is it all cash like in aforementioned example)?
When they do, how do you liquidate the shares in case company is not listed?
What happens if you leave the company on bad terms (they don’t like you leaving) and nobody is willing to buy your shares from you?

trickywoo

8,171 posts

178 months

Wednesday 13th November
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Articles of association will say how everything works.

HootersGsy

539 posts

84 months

Wednesday 13th November
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Articles and any decent start up should have a shareholders agreement.

Be aware shares in a private company are not liquid so trying to realise them may be completely tied in to when the founders wish to exit or subject to any number of restrictions. As a start up they may also be worthless if the business fails (or worth a lot if it does really well) so make sure you have your eyes wide open.

I 8 a 4RE

Original Poster:

137 posts

189 months

Thursday 14th November
quotequote all
HootersGsy said:
Articles and any decent start up should have a shareholders agreement.

Be aware shares in a private company are not liquid so trying to realise them may be completely tied in to when the founders wish to exit or subject to any number of restrictions. As a start up they may also be worthless if the business fails (or worth a lot if it does really well) so make sure you have your eyes wide open.
OK thanks both.

This is exactly what has me worried. Listed companies I can track the share price and now at anniversary what the amount will be.
Equity in start-up / scale-up ... who determines value?

Would be better in many ways if it simply was cash-equivalent, but then how do you benefit from 'event' (PE buy-out, acquisition or IPO).

mx stu

732 posts

171 months

Thursday 14th November
quotequote all
HootersGsy said:
Articles and any decent start up should have a shareholders agreement.

Be aware shares in a private company are not liquid so trying to realise them may be completely tied in to when the founders wish to exit or subject to any number of restrictions. As a start up they may also be worthless if the business fails (or worth a lot if it does really well) so make sure you have your eyes wide open.
Exactly this. You'll typically be able to 'buy'* shares at a relatively nominal value in the early stages of a business given there is normally a few years of losses, no dividends and the voting rights are so limited that you can't do much to dictate how it operates.

In my experience unless you're one of the founders then initial hires are normally given share options, typically under an Enterprise Management Incentive Scheme. The conditions of exercise would be linked to, say, an exit or drafted widely enough to say at the Directors discretion. Many benefits here including you would be entitled to a proportion of proceeds on an exit but it wouldn't cost you anything up front. At the same time if you did leave then the agreement could effectively be ripped up without the rigmarole of having to organise the transfer of actual shares. If, however, you left after a point where real value had accrued in the company then again it may be possible to retain the share options (although they be non qualifying for various tax efficient benefits).

If I were in your position I would want to have an equity interest in the business, but at the same time for day to day remuneration (unless getting a meaningful shareholding) would want a strong bonus structure with clear milestones.

(*) When I say buy I'm thinking of (a) the commercial price that the Directors are happy for you to buy share sat and (b) the open market value for tax purpose, broadly if you pay less than the OMV then it might be a taxable benefit as additional remuneration.

NDA

16,452 posts

173 months

Thursday 14th November
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It's worth re-reading what Mx Stu has written above - as that's pretty much it.

In simple language - start ups will offer you options... these are not really shares, they are an option to buy after, say, 2 years of continuous employment. They are also often only valid whilst you remain an employee.

There are, increasingly, 'growth shares'. Also options - but they assume a value on the business on the day you joined and that's deducted from the value if you ever sell them.

Companies also can give 'real' shares - but they have almost no value. A company I worked for turned 4 shares into 40,000 shares - they were worth a fraction of a penny. Given the company was not worth much, they had zero value.

I have pretty much repeated what Mx Stu has already said.... hope it makes sense.

I would want what is sometimes called 'sweat equity'. I am worth, for example, £100k a year. I will take £80k but I want 30k in actual equity - not options.

stuthemong

1,778 posts

165 months

Friday 15th November
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To anyone taking shares or options as part of their package - MAKE SURE all the companies HMRC paperwork is filed correctly. Every. Single. Year.

You need to make sure your shares or options are valued with HMRC when granted, and are registered with a scheme (EMI) that means you'll pay either 10 or 20% tax. If your company messes up the paperwork, you lose, not the company. You'll have to pay tax at PAYE rates. This is up to 65% above 100k.

So Just make sure and triple sure that if you have shares your company accountant has properly submits the paperwork every year.



Assuming equity or options are interesting to you, remember it may take many years for a company to grow and you often lose rights to options if you quit /leave.... So depending on the deal, chances are you'll be in it for a mkd/long term haul. IMe worst thing to do is do lots of the hardworking up front when there cashflow and challengong startup stress and issues and crazy hours, to leave a few years in and take nothing... 2 years later they sell the company and you retain nothing.so consider that in your decision, but also realise once you've left a small company you have no value to them so they may be able to dilute you out and things like that.

Oh, also make sure aticiles of association are just ordinary shares for everyone, no silly preferetial dilution A shares of stuff like that or your shares will probably never make money even if company sells for reasonable amount.

And finally, if you're in a company, with options, and it's all buttoned up with the tax man, losing right to options can act like golden hand cuffs. You'll be being paid under market rate for your role as they know that if you leave, you lose what you've worked for, so just be smart going into this and, IMO, especially for the inexperienced, tbink of shares as a potential unexpected bonus, don't really factor them into your remuneration. In 90%of cases they be worthless... . But back the right horse and you won't have a mortgage! It can be wild ride, have fun!

stuthemong

1,778 posts

165 months

Friday 15th November
quotequote all
mx stu said:
Exactly this. You'll typically be able to 'buy'* shares at a relatively nominal value in the early stages of a business given there is normally a few years of losses, no dividends and the voting rights are so limited that you can't do much to dictate how it operates.

In my experience unless you're one of the founders then initial hires are normally given share options, typically under an Enterprise Management Incentive Scheme. The conditions of exercise would be linked to, say, an exit or drafted widely enough to say at the Directors discretion. Many benefits here including you would be entitled to a proportion of proceeds on an exit but it wouldn't cost you anything up front. At the same time if you did leave then the agreement could effectively be ripped up without the rigmarole of having to organise the transfer of actual shares. If, however, you left after a point where real value had accrued in the company then again it may be possible to retain the share options (although they be non qualifying for various tax efficient benefits).

If I were in your position I would want to have an equity interest in the business, but at the same time for day to day remuneration (unless getting a meaningful shareholding) would want a strong bonus structure with clear milestones.

(*) When I say buy I'm thinking of (a) the commercial price that the Directors are happy for you to buy share sat and (b) the open market value for tax purpose, broadly if you pay less than the OMV then it might be a taxable benefit as additional remuneration.
Excellent post.

mx stu

732 posts

171 months

Friday 15th November
quotequote all
stuthe said:
To anyone taking shares or options as part of their package - MAKE SURE all the companies HMRC paperwork is filed correctly. Every. Single. Year.

You need to make sure your shares or options are valued with HMRC when granted, and are registered with a scheme (EMI) that means you'll pay either 10 or 20% tax. If your company messes up the paperwork, you lose, not the company. You'll have to pay tax at PAYE rates. This is up to 65% above 100k.

So Just make sure and triple sure that if you have shares your company accountant has properly submits the paperwork every year.

This isn't publicised anywhere near enough...... even if one employee buys shares HMRC needs to be notified that its a non-tax advantaged scheme and nil returns (Form 42) have to filed every year thereafter.

On the Valuation point you can only get HMRC agreement to values used for EMI/ CSOP purposes, other than you really need to make sure you/ the company/ your accountant is on the ball and the valuation had been prepared on the right basis. I've seen so many occasions over the years where an accountant (that doesn't really do tax valuations often) has arrived at a valuation that doesn't stack up to HMRC or pass muster with advisers on a Due Diligence exercise. Can quite quickly become a big problem.....

bmwmike

2,060 posts

56 months

Tuesday 19th November
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Interesting thread. Also worth being aware of the term "minority discount" aka being screwed because "limited market" for the shares at this time.

Regarding HMRC does that apply to shares granted as part of a company scheme that has not yet vested, and that those shares are ultimately paid out via payroll? I'd assume not as it's basically held back PAYE.


mx stu

732 posts

171 months

Tuesday 19th November
quotequote all
bmwmike said:
Interesting thread. Also worth being aware of the term "minority discount" aka being screwed because "limited market" for the shares at this time.

Regarding HMRC does that apply to shares granted as part of a company scheme that has not yet vested, and that those shares are ultimately paid out via payroll? I'd assume not as it's basically held back PAYE.
Minority discounts encompass many different factors including lack of marketability. Works both ways as often I have clients who, say, want to reward long standing employees with shares in their company and are of the view that my business is worth £1m and I want to give them 5% so it's going to cost them £50,000. When you advise on a value that it comes out significantly lower and it means they can get shares to them much cheaper than that they are happy. The other side of the coin is an exiting employee who's helped build the business, you want to give them a pro-rata share of value (outside of a whole company exit) and then get hit with a tax charge as additional remuneration as it's more than market value for their minority shareholding.....

On the HMRC point not 100% sure what you mean. With actual shares the typical tax points are on acquisition and disposal. Vesting is more commonly associated with share options. Normally in those cases I grant you an option to buy x number of shares, which you can exercise when certain conditions are hit (time or performance say). That's not normally taxable. When you then exercise the option to buy the shares if it's not a tax advantaged option then you pay the exercise price and are taxed on any increase in value. Quick example - I grant you an option to buy shares at £1 in three years. Three years passes (so they've vested) and someone comes along and offers to buy the company for £3 per share. You pay the £1 and sell for £3 and get taxed on the £2 as income. In that case it may need to be withheld via payroll and you might need to pay NI.




bmwmike

2,060 posts

56 months

Tuesday 19th November
quotequote all
mx stu said:
Minority discounts encompass many different factors including lack of marketability. Works both ways as often I have clients who, say, want to reward long standing employees with shares in their company and are of the view that my business is worth £1m and I want to give them 5% so it's going to cost them £50,000. When you advise on a value that it comes out significantly lower and it means they can get shares to them much cheaper than that they are happy. The other side of the coin is an exiting employee who's helped build the business, you want to give them a pro-rata share of value (outside of a whole company exit) and then get hit with a tax charge as additional remuneration as it's more than market value for their minority shareholding.....

On the HMRC point not 100% sure what you mean. With actual shares the typical tax points are on acquisition and disposal. Vesting is more commonly associated with share options. Normally in those cases I grant you an option to buy x number of shares, which you can exercise when certain conditions are hit (time or performance say). That's not normally taxable. When you then exercise the option to buy the shares if it's not a tax advantaged option then you pay the exercise price and are taxed on any increase in value. Quick example - I grant you an option to buy shares at £1 in three years. Three years passes (so they've vested) and someone comes along and offers to buy the company for £3 per share. You pay the £1 and sell for £3 and get taxed on the £2 as income. In that case it may need to be withheld via payroll and you might need to pay NI.
Wish I'd had your contact details when disposing of some shares in a private company some time ago! Sounds like you know more than the muppets that advised me at the time. Still live and learn.

Regarding the vesting - employee gets given shares of say 12k which are vesting over a 3 year schedule with the first block of 4k after 1yr sold and proceeds paid to employee via payroll. Not options but no choice to defer sale e..g if the stock price is in a dip. I take it HMRC don't need to know about that because technically the employee doesn't own the shares they are just held in trust until sold.

mx stu

732 posts

171 months

Tuesday 19th November
quotequote all
bmwmike said:
Regarding the vesting - employee gets given shares of say 12k which are vesting over a 3 year schedule with the first block of 4k after 1yr sold and proceeds paid to employee via payroll. Not options but no choice to defer sale e..g if the stock price is in a dip. I take it HMRC don't need to know about that because technically the employee doesn't own the shares they are just held in trust until sold.
Sounds perhaps like SARs (Share Appreciation Rights)? So you never physically own the shares, just end up with a cash bonus that is linked to the performance of those shares. It's essentially the same net result (post tax) as physically owning the shares (assuming an employee benefit trust would buy the shares/ they could be sold in the market) without having the initial outlay...

mx stu

732 posts

171 months

Tuesday 19th November
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That being said if its a US employer it might be a restricted stock unit (RSU) which they tend to like and are have some subtle differences to SARs. I tend to do less US stuff as it's no fun doing share valuations for US purposes as the IRS are too prescriptive, whereas you can have some good negotiations with the guys at HMRC.

bmwmike

2,060 posts

56 months

Tuesday 19th November
quotequote all
mx stu said:
That being said if its a US employer it might be a restricted stock unit (RSU) which they tend to like and are have some subtle differences to SARs. I tend to do less US stuff as it's no fun doing share valuations for US purposes as the IRS are too prescriptive, whereas you can have some good negotiations with the guys at HMRC.
Yes apologies my question was in relation to RSU. The acronym escaped me earlier. Thanks for the info.