Equity Incentivisation / ownership schemes

The terms of a venture capital investment generally include a provision that the investee company will establish a share option pool. This is a pool of shares notionally set aside for future allocation to employees, consultants, and/or advisers: the intention is to give those people who are regarded as key to the growth prospects of a business (“stakeholders”) an ownership stake in the company. Whilst the option pool will normally not be more than 10–15% of the fully diluted ordinary share capital and so is not a large enough portion to give any form of stakeholder control, it nonetheless creates a commonality of interest with the venture capital investor and any other external investors. Giving the opportunity to participate in the equity of the company and hence any profits realised on a future sale provides a financial incentive for the management team/stakeholders to grow the business to that end.

There are a number of ways to structure an equity incentive. Those most commonly utilised by venture capital backed companies are: Enterprise Management Incentive Scheme, growth share schemes, phantom/ shadow share schemes, and unapproved share options. The choice of which structure to use in any particular case will be based on both commercial and tax factors, and a combination of different schemes may well be appropriate to ensure all relevant stakeholders can be effectively brought on board.

This article sets out a summary comparison of these various structures.