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The Joy of Enterprise Management Incentives
Read our free guide to the UK's most tax-efficient share scheme.
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5 min read

How to reward advisors, contractors and others with equity

How to reward advisors, contractors and others with equity
How to reward advisors, contractors and others with equity

Last updated: 17 April 2024

Sharing ownership to incentivise key team members is a winning strategy. Share schemes, like Enterprise Management Incentives, provide tax benefits while enabling startups to reward team members with equity.

However, the EMI scheme is only eligible for UK-based full-time employees on the payroll – but businesses may also want to reward non-employees like advisors, consultants, contractors and freelancers.

So, if EMI isn't an option, what can you do?

Don’t worry – unapproved options and growth shares have got your back. Here’s all you need to know about rewarding non-employees with shares or options.

This guide is for UK-based companies.

What's a non-employee?

Firstly, let’s define what a non-employee is. A non-employee might be a consultant, advisor, freelancer or other contractors you don’t directly manage.

Essentially, if you're not paying them through PAYE, they're a non-employee.

Their relationship with the startup could be short-term, e.g. a contractor completing ad-hoc tasks, or long-term, e.g. a consultant or advisor brought in to help a startup on their journey. 

Why reward a non-employee?

Advisors and consultants can plug short-term gaps in the teams’ skillsets by providing expert advice on products and services, analysing data, assisting with compliance and regulation, providing niche technical expertise, or practically anything else. 

For example, a business may require a team of developers to build an app or software application to accomplish its go-to-market strategy. 

Their completion of this task could increase the business' value – so offering those developers equity gives them the opportunity to benefit from the value they’ve created. 

Employee or not, if they've made a difference, so why not reward them?

Let’s examine the two main ways to give non-employees a piece of the pie.

How to reward non-employees with equity

1. Unapproved options

The word ‘unapproved’ doesn’t sound great, but all it means is that unapproved options aren’t part of the UK government’s ‘approved’ employee share schemes.

Approved schemes like the EMI come with various benefits and tax perks. But what unapproved options lack in tax benefits, they more than make up for in flexibility.

The EMI scheme is designed for UK-based startups with fewer than 250 full-time employees, and the total market value of options can’t exceed £250,000.

Whereas, unapproved options are available to all businesses and can be used to reward key players who aren’t employees in the UK and abroad.

How unapproved options work

By awarding unapproved options, you're giving someone the opportunity to acquire shares in the future at a pre-agreed price, which is specified at the time the options are granted.

This is typically the market value of the shares on the date they’re granted, but it can be set at any price, including below market value. 

When granting unapproved options, the business can set vesting schedules.

For instance, options can vest with time and performance-based milestones, meaning a certain time period needs to elapse and/or the recipient must meet performance milestones before they can exercise their options.

For non-employees, this could be anything, from increasing organic search traffic by 50% to building a functional web app or product prototype.

Once conditions are met (if specified), individuals can exercise their options and become legal shareholders. They can then benefit from dividends, buybacks or share transfers. 

Unapproved options are flexible, simple, and easy to issue to practically anyone – including non-employees. 

Tax on unapproved options

Taxation on unapproved options is less efficient than approved share schemes like the EMI scheme.

Income Tax

When options are exercised, individuals have to pay Income Tax on the potential profit between the exercise price and the higher market value of the shares.

Capital Gains Tax (CGT)

When shares are sold, holders pay CGT, if the shares are sold for more than the price they paid at exercise. There is no Business Asset Disposal Relief (BADR) as there is for EMI schemes.

National Insurance Contribution (NIC)

For businesses, NIC applies if the shares qualify as a Readily Convertible Asset (RCA), but businesses can offset costs against a Corporation Tax bill.

Unapproved options are highly flexible and quick to set up. Businesses can attach various conditions tailored to each individual, so they’re suitable for almost any non-employee. 

2. Growth shares

The second method of rewarding non-employees is growth shares.

Growth shares are issued at a hurdle rate – they only gain value if the company’s share price rises above that hurdle. This in-built mechanic is ideally suited to rewarding non-employees contributing to a business’ growth.

Like unapproved options, there are no business limits on growth shares, so they’re suitable for any business of any size. 

How growth shares work

Growth shares are issued at the current share price, plus a small premium to negate the risk of HMRC retrospectively deciding the shares were undervalued when issued. This premium is usually 10 to 40%.

Suppose a business’ shares are valued at £5, and a 10% premium is added. Then, the share value for the purposes of growth shares is set at £5.50.

The business grows, and their shares are now worth £10. They decide to exit. Original shareholders are eligible to receive the full £10 per share, whereas the growth shareholder will receive £4.50 per share, reflecting the time they were part of the business.

The recipient also has to pay the nominal value for each share to receive them, as growth shares must be issued at nominal value.

FYI - the nominal value is the face value of a share. This can be literally anything but typically ranges from £0.000001p per share to £1 per share.

It’s worth mentioning that growth shares are shares, not options, so the recipient will receive them right away. However, as with unapproved options, you can set a vesting schedule with conditions attached. 

These can either be time or performance-based milestones, or both. If the recipient does not fulfil the criteria, then your company may convert the V shares into deferred shares which have no economic rights. 

Tax on growth shares

Despite not having the same flexibility and efficiency as approved schemes, growth shares are more tax-efficient than unapproved options.

Income Tax

So long as HMRC doesn’t believe shares were undervalued, recipients won't pay Income Tax when they receive their growth shares. There’s no PAYE or National Insurance either.

Capital Gains Tax

Once sold, CGT applies to any growth in the shares.

There we have it – two rock-solid methods for rewarding non-employees. Which one should you choose?

Should I choose unapproved options or growth shares?

The answer to this question depends on your specific business needs.

Yes, it’s a bit of a cop-out answer, but there are so many factors at play, such as the business’s current value, the number of shares already issued, current shareholders, and intention of granting the shares or options.

Fundamentally, both unapproved options and growth shares are excellent for incentivising non-employees towards specific goals.

We have a handy calculator you can use to compare the two. Open up this guide, plug in some numbers and get a rough idea of how the two square up. 

It’s also worth mentioning that unapproved options don’t require changes to the standard Articles of Association a lot of businesses adopt, whereas, growth shares do - particularly if you intend to utilise the Enterprise Investment Scheme (EIS).

Can I offer both?

Absolutely! It’s possible (and quite common) to set up an EMI scheme for full-time employees based in the UK and give unapproved options and/or growth shares to non-employees. 

How can I reward non-employees not based in the UK?

Yes! But if you're thinking of awarding someone overseas with unapproved options or growth shares, do your due diligence. Tax implications, laws and regulations vary from country to country. If you're ever in doubt, ask your lawyer or accountant. 

Setting conditions

Growth shares and unapproved options provide incentives beyond capital alone. They offer an opportunity to reward collaboration with non-employees instrumental to the business’s success. 

If you intend to design a conditional growth share scheme or unapproved options scheme, do it right.

Conditions must be outlined in the shareholder’s agreement and be crystal clear, measurable and tangible. All parties must agree on them.

These could relate to the business (e.g. increase monthly recurring revenue by X%) or to the individual (e.g. increase sales leads by 500%). Or be something as simple as staying with the company for a certain amount of time, etc. 

How to set up unapproved options or a growth share scheme

Our top tip? Choose a purpose-built platform.

You can set up a conditional growth share scheme and/or unapproved options scheme on Vestd and approved schemes like EMI, and manage your company's equity all in one place. 

Vestd doesn't just save time and hassle, it makes equity rewards inspiring. Recipients get access to their own unique dashboard where they can view and track their vesting shares or options.

We make the process as straightforward and stress-free as possible, so you can focus on growing your business. Book a free consultation with a specialist today to find out more.

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