I gave this presentation with Cormac Brown as part of a series of presentations designed to highlight the role share-based remuneration can play for high-potential start up companies
1. Equity Based Incentives
Trinity Research & Innovation
Niall Kavanagh- Elan Corporation plc
Cormac Brown - MASON HAYES & CURRAN
2. Independent national association
operating within IBEC
Promote all forms of Employee
Share incentives (ESI)
Executive Council drawn from
Membership
Represents various types of
business and commercial activity.
3. Aim – promote
Affiliated to IBEC
Founded in 1978 profit sharing in
in the 1990's
Ireland
Conferences, road Unique
Renamed shows and relationships RC ,
lobbied Gov Dept and EU
Develop links with IPSA contribute to International
employer bodies EU projects on Profit-sharing
(e.g. Amcham) equity incentives Association (IAPF)
4. Terminology
Restricted
Stock
Employee
Long term
Share
incentive
Ownership
packages
Trusts
Options
Profit Equity
sharing awards
Employee
financial
involvement
5. Foundations
People
Employee Increase No One-
look after
act/think their net Size-Fits-
their own
as owners worth All
assets best
6. Perfect Storm
Regulation Lack of
complexity Cash
Need to
get to Need good
market people
quickly
Demanding
investors
Equity Awards
15. Finance Act 2011 changes
Overview
• Employer now responsible for PAYE on share awards
• Share options – employee pays directly
• Employee’s PRSI extended to share awards
• Universal Social Charge due on share awards – 7%
16. PRSI – current situation
• No employer PRSI
• No employee PRSI on historic grants – 2011 only
• Share awards and share options
• 2012 no employee exemption
17. Schemes affected
• All schemes which involve the granting of shares to employees
• Stock options
• Restricted Shares
• Restricted Stock Units (RSU)
• Employee Stock Participation Plans (ESPP)
• Long Term incentive Plans /LTIP locked in Shares with vesting
• Free Shares
• Share Matching Plans
18. Employee Equity Incentive Awards
• Value of shares taxed as benefit-in-kind
• Value of share = amount liable to tax
• Share options – profit on exercise
• Restricted stock units – value of shares on vesting
• Capital Gains Tax on disposal
• Income tax / CGT – 52% v 30%
19. Share Schemes – Current Position
IT PAYE USC PRSI
SHARE N Y Y Y
AWARDS
SHARE Y N Y Y
OPTIONS
20. Revenue approved
• Save As You Earn
• Approved Profit Sharing Schemes
• Approved Employee Share Ownership Trust (ESOT)
21. Revenue unapproved
• Share Options
• Restricted Stock Units (RSUs)
• Phantom Share Schemes
• Restricted Shares
• Sale Share Plan
• Joint Ownership Plan (JSOP)
• Growth Shares
• Deferred Convertible Shares
22. Share Options/RSUs
• Entitlement/promise of future share
• Very popular – U.S. /tech firms
• Retention/performance criteria can be used
• Flexible
• Easily understood
• Disadvantage – income tax 52%
24. Share awards
• Classic issue – how is tax liability financed??
- Options – exercise to sell
- RSUs – vest and sell
- 52% Income tax on gain
• Best result = gain liable to CGT 25%
- Get share low and sell high
- Value grows into share over holding period
25. CGT treatment – 25%
• Employee needs to own share
• Bad leaver provision
• Income Tax on acquisition – issue
• Start up companies – value of shares
• No/low value, no/low tax
• Established companies
• Minority discount – up to 90%??
• Different share classes
26. CGT treatment
• Aim – suppress value on acquisition
• Sale shares
• Participate in proceeds on sale.
• Growth shares
• Value grows into shares on meeting defined targets
• Anti-avoidance issues
• “Beauty” of restricted shares
27. Restricted shares - clog
• Beauty
- reduces cost on acquisition
- CGT on exit
• Agreement to restrict share transfer = tax reduction
• No sale/transfer for restricted period
• Income tax/PRSI on taxable amount
• Very beneficial relief, no firm wide requirement
• No statutory approval required
28. Restricted Shares
Restricted shares – reduction in taxable value of shares where held
for specified period.
Holding Period Years Reduction
1 10%
2 20%
3 30%
4 40%
5 50%
>5 60%
29. What Next
“… Through the promotion of employee share
ownership we firmly believe that EFI can
play a central role in restoring
competitiveness to the Irish economy.
It is our intention to maintain this focus and
ensure that the benefits of employee
ownership and commitment align with
Government strategy in navigating through
these unprecedented economic times”
Chairman
Irish ProShare Association
30.
31.
32. Dilution Trumpet
• Deal with the dilution caused by funding rounds
• Keep team motivated when scaling the business
• Can “re-flate” with share options
• The tax currently arising on exercising is twice that
arising had the shares been directly owned
33. Membership
• Open to all those interested in
• LinkedIn group
Employee Share Incentives
- www.linkedin.com
• Several classes
• Website
– Corporate membership
- www.ipsa.ie
• Membership Drive
– Company/service provider – Need Members
membership
– Flexibility
– Individual membership
(academics and students) • More members the
stronger the voice
34. Cormac Brown
cbrown@mhc.ie
Niall Kavanagh
niall.kavanagh@elan.com