Ensuring your share plan is not a recruitment risk
When Revolut’s share plan controversy erupted over Christmas, leaving former employees facing unexpected and significant income tax bills, most founders probably read the story and thought that is just a big company problem.
A common assumption to make, but an incorrect one as the issues at the heart of the Revolut case, including confusion over tax treatment, a lack of clear communication with leavers, and assumptions that turned out to be wrong, can happen every day in companies of every size.
For a startup, where share plans are often one of the most powerful tools available for attracting and retaining talent, getting this wrong can carry consequences far beyond a tax bill.
Think about what you’re really offering when you ask someone to join your team. In many cases, you’re asking them to accept a salary below what they might earn elsewhere, in exchange for a stake in something that might, if everything goes as expected, be worth considerably more.
That’s not just a financial arrangement, but a promise and if the share plan behind it is poorly structured or badly managed, you’re not just creating a legal and tax headache. You’re breaking faith with the people who believed in you enough to take that risk.
Where things go wrong
Share plans exist at the intersection of employment law, tax law, and corporate governance. That’s a complicated place to be and the complexity tends to catch companies out in predictable ways.
The most common problem is a failure to think through what happens when someone leaves. Many startups allow former employees to retain their options or shares without fully understanding the tax consequences of doing so.
For the employee, what looked like a valuable benefit can become a liability and for the company, the reputational damage and potential legal exposure, can be severe.
Tax-advantaged share plans like a Company Share Option Plan (CSOP) or the Enterprise Management Incentive can give employee share options which can be enormously effective, but the advantages are conditional.
They depend on the right paperwork being in place at the right time, the right processes being followed and the right advice being taken. Not just at the point of setting the plan up and agreeing the rules, but at every key moment, including annual reports for HMRC when appropriate, when awards and options are granted, when they’re exercised and when corporate events like funding rounds, acquisitions or exits occur.
Communication is also a common problem, with companies often making broad promises to employees about what their shares will be worth or how they’ll be taxed, without the detail to back those promises up. Tax treatment can change and corporate structures evolve, so what was true at grant may not be true at exercise. Rules and deadlines can change.
When employees discover the gap between what they expected and what they actually receive, the fallout is rarely quiet.
Five steps to keeping your share scheme safe
None of this means share plans should not be used, quite the opposite in fact. A well-structured scheme, properly managed, remains one of the most effective ways to align your team with the long-term success of the business. The key is to treat the plan as a living document, not a box to tick at incorporation.
Think carefully about leavers. Decide upfront whether options should lapse when someone leaves and under what circumstances. Good leaver and bad leaver provisions need to be clearly defined in the plan rules and dovetail into your Articles of Association and employees need to understand them.
Understand your plan rules in detail. Tax-advantaged schemes carry real benefits, but those benefits can be lost if the rules aren’t followed correctly. Take advice at the point of grant, at the point of exercise and whenever anything significant changes in the business (or preferably before the change happens).
Communicate clearly and accurately. You don’t need to explain every possible tax scenario to every employee, but you do need to alert people to the moments that matter, such as when their tax position might change, when they need to make a decision and when they should take their own advice.
Don’t overpromise. Avoid making definitive statements about tax outcomes or financial returns. These depend on factors outside your control, such as legislative changes, corporate events, the employee’s personal tax position. Promise the opportunity, not the outcome.
Review regularly. A plan that works well for a ten-person seed-stage company may be wholly unsuitable for a Series B business with 150 employees. As the company grows and changes, the plan needs to keep pace. Regular reviews aren’t an overhead, but a valuable investment in the integrity of the promise you’ve made to your team. It also demonstrates to your option holders that you are also keeping an eye on what matters to them.
The Revolut story will fade from the headlines, but the lesson it offers is permanent – equity is only as valuable as the trust that surrounds it. Get the structure right, and your share plan becomes one of the most powerful tools in your business. Get it wrong and it could undermine the trust you’ve worked so hard to build.
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