Employee Share Schemes

Quick Insights: How Much Does a Share Scheme Cost?

Series 2: Employee Share Scheme Costs, Growth & Taxation

Dive into the details of how to set up Employee Share Schemes effectively, from growth shares and hurdle rates to essential documentation and common pitfalls. 

In this Quick Insight, we’ll address a critical question for UK startup founders: “How much does a share scheme cost?” Understanding the financial implications of implementing an Employee Share Scheme (ESS) is essential for budgeting and strategic planning. Let’s break down the costs involved.

Direct Costs of Setting Up an ESS

Setting up an ESS involves several direct costs:

  1. Legal Fees: You’ll need to draft share scheme agreements and possibly amend your company’s articles of association. Legal fees can vary widely, typically ranging from £2,000 to £5,000, depending on the complexity of the scheme and the lawyer’s rates.

  2. Consultation and Administration Fees: Hiring a consultant to design an effective scheme can cost anywhere from £1,000 to £3,000. Ongoing administrative costs for managing the scheme can also accrue, depending on the number of participants and transactions.

  3. Valuation Costs: For tax compliance, particularly with HM Revenue and Customs (HMRC), you might need a formal valuation of your company to set the share price for the scheme. This can cost between £1,000 and £2,000.

Indirect Costs & Considerations

Beyond direct outlays, there are other factors to consider:

  1. Tax Implications: There are potential tax benefits and liabilities. For example, certain share options, like those granted under Enterprise Management Incentive (EMI) schemes, offer tax advantages to both employers and employees but must meet specific criteria set by HMRC.

  2. Dilution of Equity: Issuing shares to employees increases the number of shares outstanding, which dilutes existing shareholders’ equity. While not a direct cost, this dilution can impact the perceived value of your company and your control over it.

  3. Employee Training and Communication: Ensuring that employees understand the benefits and obligations of the share scheme is crucial. This might require training sessions or producing informational materials, which can also incur costs.

Benefits Justifying the Cost

Despite these costs, the benefits of a well-executed ESS often outweigh the expenditures. They can enhance employee retention, align employee goals with company performance, and attract top talent by offering compensation that grows with the company’s success.

The Bottom Line

Implementing an Employee Share Scheme is a significant decision that involves upfront costs and strategic considerations. However, the potential to boost employee engagement and drive company growth can make it a worthwhile investment. By aligning employee interests with the growth of your company, an ESS can serve as a powerful tool for fostering a motivated and committed workforce.

As you consider the various aspects of Employee Share Schemes, it’s also crucial to understand their tax implications. In our next Quick Insight, “How Are Employee Share Schemes Taxed?”, we will delve into the tax considerations you need to be aware of. This will help ensure that your scheme is not only effective but also compliant with UK tax regulations.

Considering your employee share scheme options? Let Elliott Gaspar, Standard Ledger’s Founding UK Director, help you untangle the specifics. With expertise in financial strategy and a track record of supporting startups, Elliott can provide you with the insights you need to make informed decisions. Book your free, no-obligation chat today!

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