With employee share schemes growing in popularity, in his latest blog, Alex Taylor, Business Development Manager at The International Stock Exchange (TISE), explores the various features of employee share schemes and how new secondary market trading platforms are emerging to support related liquidity events. 

Employee share schemes (ESSs) are a popular tool that growing businesses are using as a remuneration strategy to attract and retain the best talent. Data from HMRC shows that the total number of companies in the UK operating an ESS in 2023 was 19,990, which is up 7% on 2022. Such equity compensation schemes help to align the interests of employees with the longer-term success of the business. An aspect of ESS that isn’t always readily available for employees, are liquidity events. Such events are milestones that mark the opportunity for participants to realise the value of their shares.

"Data from HMRC shows that the total number of companies in the UK operating an ESS in 2023 was 19,990, which is up 7% on 2022."

Equity compensation schemes can take various forms, with stock options, restricted stock units and employee stock purchase plans being the most common. Each structure has its unique characteristics, but they all share the fundamental goal of tying employees' financial interests to the company's performance.

1. Stock Options:
• Employees are granted the option to purchase company shares at a predetermined price, known as the exercise price.
• The option typically has a vesting period during which employees must meet certain conditions, such as time in service or achieving performance milestones.
• Upon vesting, employees can exercise their options and buy shares at the predetermined price. Employees may potentially realise an immediate profit if the current market price exceeds the exercise price.
2. Restricted Stock Units (RSUs):
• Employees receive a promise to receive a certain number of company shares at a future date.
• RSUs often have a vesting schedule tied to the employee's tenure, and once vested, the shares are delivered to the employee.
• Unlike stock options, employees do not need to purchase the shares; they receive them outright.
3. Employee Stock Purchase Plans (ESPPs):
• Employees can purchase company shares at a discount, often through payroll deductions.
• ESPPs typically have a fixed offering period during which employees accumulate shares, and at the end of the period, the purchased shares are delivered to participants.

Vesting

Vesting is a critical component of an ESS, ensuring that employees remain committed to the company’s long-term success. Vesting schedules vary but typically follow an immediate, cliff or graded structure:

1. Cliff Vesting:
• In cliff vesting, employees become fully vested in their shares after a specified period (typically 1-3 years)
• Cliff vesting provides a strong incentive for employees to stay with the company for the entire vesting period, as they only gain access to the full value of their shares at end.
2. Graded Vesting:
• Graded vesting allows for a gradual accrual of vested shares over time.
• Employees may become partially vested in their shares at regular intervals, such as monthly or quarterly. This can help to provide motivation throughout the vesting period.
3. Immediate Vesting:
• Immediate Vesting ensures that the employee receives 100% ownership of their shares. It means that they can sell or exercise immediately.

Liquidity events

Liquidity events are moments when employees can cash out their vested shares partially or in full. Employees often have a need for liquidity events to pay for life events such as weddings, house purchases or holidays. Common liquidity events include secondary share trading, initial public offerings (IPOs), mergers and acquisitions (M&A), or share buybacks. It's crucial for employees to understand the implications of each event, as they can significantly impact the value and accessibility of their shares.

1. Secondary Trading:
• Secondary Trading liquidity events allow existing shareholders to cash out (or buy extra) their existing shares.
• Platforms such as TISE Private Markets allow employees to trade for free during regular liquidity events.
2. IPOs:
• IPOs offer employees the opportunity to sell their shares on the public market.
• Lock-up periods may apply, restricting the ability to sell immediately after the IPO.
3. Mergers and Acquisitions:
• In M&A scenarios, the acquiring company may assume or cash out existing equity awards.
4. Share Buybacks:
• Companies may repurchase shares from employees, providing liquidity without the need for an external event.

Employee share schemes are powerful tools for aligning the interests of employees and companies. Understanding the intricacies of these schemes, including their structures, vesting processes, and the dynamics of liquidity events, is essential for both employers and employees.

"Providing employees with liquidity events for the secondary trading of shares is a key focus for TISE Private Markets."

As the landscape of business development continues to evolve, a well-designed equity compensation scheme can be a key differentiator in attracting and retaining top talent in the competitive UK market.

Providing employees with liquidity events for the secondary trading of shares is a key focus for TISE Private Markets. If you’d like to find out more about our platform, please take a look at TISE Private Markets and request a demo with a member of our team.