Employee Share Incentives

A share scheme works by granting employees a direct or indirect interest in the shares of a company. The form of interest will depend on the type of incentive plan used by the company. The company issuing the interest is often the parent company of the group, which may not necessarily be the direct employer of the individual.

The two main types of share incentive plan are share-based plans and option-based plans. Share-based plans give employees a direct equity interest in the company. Options only give employees the right to be issued with new shares in the future. There are a range of ways to implement both share-based plans and option-based plans, and each type of scheme has particular advantages and drawbacks. We can help you to understand the most appropriate incentive scheme for your company’s particular circumstances.

A share option works by a company giving an employee a right (known as an option) to buy a specific number of shares in the company, at a specific price (known as the exercise price) and at a specific time (known as the option period).

The detailed rules of an employee share option plan (ESOP) are generally set out in a scheme rulebook. However, additional terms for specific employees may be included in the option certificates issued to those employees.

An ESOP of 10% of the share capital is the most commonly cited rule of thumb for Seed and pre-Series A start-up companies in Ireland. However, practice varies significantly between companies, with pool sizes of 5% and 15% also being common at this stage. The size of the ESOP commonly rises as the company progresses past Series A and into further and larger funding rounds.

Tax may be payable by the company and/or by the employee. The timing and size of any tax liability will depend on a number of factors, including: the type of share or option scheme used, the tax residence of the parties and value of the shares or options.