When you are an owner of your own recruitment agency you sometimes feel you want to tie in or reward some of your important, profitable employees/directors by offering them shares of your company. Company shares offer the possibility of giving staff a dividend based on the company profits, a say in the running of the company and/or a portion of the sale of the agency (if and when it is sold). Whilst this may seem like a good idea, you have to weight up many things before deciding to do this and ensure it is done correctly to protect you and your agency in the future. The factors that need to be considered are:-
1. Is it the best option to give the shares away?
– Giving away shares is not a decision to take lightly or offer without consultation prior to offering. It is easy to give shares away but often hard to reverse at a later date unless you have a strong agreement in place. As are giving away a portion of a company which is owned and grown by you, does the person you are giving the shares to deserve them and will they bring something to the table that will increase your agency and your profits? It sometimes may be a better option to look at a higher salary and/or bonus scheme as these can easily be adjusted and removed if the employee does not perform?
2. How many shares should I give to the employee?
– It is not the number of shares you give an employee but the rights of those shares that is important. You do not need to give a large number of shares away to reward an employee and it is always advisable for you to remain the majority shareholder.
3. What rights will the share options give the employee?
– There are many powers you can give with share options and establishing what power you want the employee to have is important. Do you want them to only have a share of the company when it is sold or do you want them to have an annual bonus/dividend based on profitability of the company? Also will the
employee have a say in the way the agency is run and how do the shares compare to the other shareholders?
4. Is there a cost implication of issuing shares of your agency?
– When you are issuing/transferring shares on an established agency then you are seen by HMRC as giving the employee a cash sum based on the value of the company (EBITDA value). Unless the employee is buying the shares then giving them away may incur a PAYE bill on the value of the shares. Also when transferring shares you will also need to pay stamp duty to HMRC of 0.5% of the value of the transaction.
5. Do I need to get HMRC clearance for the share transfer?
– When transferring company shares it is advisable to see if you need to get clearance (approval) from HMRC for anti-avoidance of taxes. This way the transaction is approved by HMRC prior to the transfer to avoid any future tax investigation.
6. Do I need to get a Share Holders Agreement in place?
– It is always advisable to get a shareholders agreement in place so it is clearly defined what the rights the shares given hold. You can get a basic shareholders agreement but it is advisable to take legal advice to ensure you and your company are protected.
7. What happens to the shares if the employee leaves the business?
– One of the most important things to consider when issuing shares of the company is what happens if the employee leaves as you may have to end up buying the shares back or the employee may hold the shares even when they do not work for your company. You can write into the shareholders agreement that the shares are returned to the company should they leave before a company sale but this needs to be clearly defined.
As you can see the giving away of shares of your agency is not an easy decision to make and if you weigh up these considerations you should be able to protect yourself and your agency.
TBOS offers a full back office and accounts outsourcing service to recruitment agencies including giving advice on managing the shares of the agencies it services. If you would like to discuss our services please do not hesitate to contact our office.