For over 30 years, Sarah Anderson, a qualified solicitor and director at RM2 Employee Ownership, has worked with private company owners to set up employee share plan arrangements. Here she discusses how to prevent expensive mistakes.
Employee share plans are no longer the preserve of fast-growing startups. Increasingly, established businesses are using equity to retain senior staff, support succession planning and align leadership teams with long-term growth.
Recent high-profile cases, including the widely reported issues surrounding Revolut’s share scheme, highlight a recurring problem. When share plans are poorly structured or misunderstood, they can quickly become a source of tax exposure, operational complexity and reputational risk.
In a mature business, equity is typically used as part of a broader reward strategy. Shares may be used to retain key individuals, incentivise performance, or gradually transition ownership, making the design and management of the plan not just a technical exercise but a strategic one.
Where things tend to go wrong
A common pressure point is what happens when someone leaves the business, and it is surprisingly easy for companies to overlook how shares or options are treated in these circumstances.
Questions around whether a departing employee can retain their interest – whether shares or options, and how shares might be valued if a sale is required – should be clear from the outset. If those outcomes are not managed properly, this can lead to a fragmented share register or complications at the point of a sale or investment.
Tax is another frequent source of difficulty. Tax-advantaged arrangements such as Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP) can offer significant benefits, but those advantages are conditional. They rely on correct documentation, robust valuation processes and ongoing compliance with HMRC requirements. Where companies fall outside the scope of EMI or CSOP, alternative structures such as non-tax advantaged share plans, growth shares or deferred share purchase plans may be more appropriate, but these too require careful handling.
Communication can also present challenges. In many cases, the issue is not that the plan is flawed, but that expectations have not been properly managed. Over time, assumptions can build around what shares might be worth or how they will be taxed. When reality diverges from those expectations, even a well-designed plan can lead to dissatisfaction. None of this suggests that share plans should be avoided. On the contrary, when well-structured and properly managed, they remain one of the most effective tools available to align a team with the long-term success of a business.
5 steps to keeping your scheme safe
The first step is to give careful thought to leaver provisions from the outset. A well-drafted plan will clearly distinguish between good and bad leavers and set out what happens to their shares or options in each scenario. Just as importantly, those provisions need to align with the company’s Articles of Association and be supported by processes that ensure their consistent and prompt application.
The second is to ensure that the right type of plan has been chosen. EMI schemes can be highly effective where available, while CSOPs offer a useful alternative. In other cases, non-tax advantaged share plans, growth share plans, or more bespoke arrangements may be appropriate. The choice should always reflect the company’s size, structure and long-term objectives.
Third, ongoing compliance should not be underestimated. The tax advantages associated with certain plans depend on more than just getting things right at the start and require continued attention, from timely HMRC filings to reviewing the impact of corporate events such as investment or a potential exit.
The fourth step is to communicate clearly. Employees do not need to understand every technical detail, but they do need to know when key decisions arise and when their personal tax position may be affected. It is equally important to avoid overpromising. Share plans offer opportunity, not certainty, and outcomes will depend on factors beyond the company’s control.
Finally, plans should be reviewed regularly. As businesses grow and evolve, so too should their approach to equity, as a structure that worked well for a smaller company may no longer be appropriate once the business has expanded. Regular review ensures the plan remains aligned with commercial reality.
Final thoughts
Employee share plans sit at the intersection of tax, law and business strategy. When they are thoughtfully designed and actively managed, they can play a central role in driving performance and retaining key people. When they are not, the consequences can extend well beyond the balance sheet. For established businesses, the message is simple: treat equity not as an administrative exercise, but as a long-term commitment, one that deserves the same level of attention as any other critical part of the business.