A share plan must be tailored to the particular needs of the company. This publication is intended to provide some insight as to the considerations faced by private companies limited by shares wishing to put in place share plans for their employees and/or third parties and not to consider whether you need one or not.
Questions to consider before deciding on a share plan
Before putting in place your share incentive plan the following questions should be raised with the promoters:
How many members will participate in the plan?
As a general rule, a Cyprus private company limited by shares is restricted to having 50 shareholders at any given time not including current or past employees. So if the members of the plan consist of employees and none employees or only independent contractors then the number of employees is a limiting factor. Furthermore i’m sure with the Registrar’s practices in mind it will be difficult to prove that the additional members are current or past employees.
What is the frequency of entry and exit from the plan?
In a share plan structure backed by agreements and several legal engineering, every time a person enters or exits the plan, a series of actions, approvals and legal expenses will be required. A typical process flow might be:
- Subscription
- Adherence to SHA
- BOD to Issue Shares
- HE12
- Update Corporate Register
- Share Certificate
Will the plan member have any control over the company?
In a structure whereby a Private Company Limited by shares is used, then control might mean voting rights, rights to appoint a director or any other rights which might block the smooth operations of the Company.
Will the plan member have a right to participate in the future issue of shares (round b)?
At the time of entry of a new investor, the existing shareholding will be diluted (meaning that the % of ownership will be reduced) however if shares are available the crucial question is whether the existing pool of shareholders will have a right to require additional shares or not.
Will the member hold onto the shares even if he is not involved in the Company?
Perhaps the mother of all questions, if the share plan member resigns from active operations does he/she/they still retain the right to hold the shares, and if not how do you ensure that the right is withheld or restricted. Effectively shares are real property and once held they are at the disposal of the holder and not the Company however with a carefully drafted document options are available.
Can a plan member sell shares (existing member / external)?
As mentioned above shares can be sold and transferred to a third person without the approval of the Company. Perhaps considering limitation to this would be useful to control who holds shares in the Company.
Should the company be allowed to cancel the shares of a particular plan member?
The founders of the company might want to maintain control over who holds shares and as such have a right to cancel shares given in exchange of cash or a new share issue.
What considerations do you face
Let me know what considerations you faced when setting up a share plan for your Company.
Cost, Admin, Disclosure, Control
The above must be clearly understood and taken into account prior to considering what is the best legal mechanism to introduce within a plan.
The desired option must factor in the cost and time associated with the solution. On the one hand, a complex plan will most surely lead to increased administration costs and advisory fees. On the other, a simple share plan might be more practical for high turnover structures or structures that aim to have a single exit (IPO, Sale).
Complex Plans as described below will invariably require disclosure of sensitive information to the Registrar of Companies, this might be the articles of association as well as entry and exit details. A simple share plan as described below might keep this information private.
Control, would you give a third party the option to hold your shares on your behalf, how appealing is it to know that another person is in control. Complex plans will provide the highest level of control for the individual whereas light touch plans will afford the least.
Complex Share Plan
When an investor is introduced, the complex share plan will be required since it is the only way to achieve a desired level of control. The term complex share plan means a share plan which has the following particulars:
- Shareholder Agreement
- Tailored Memorandum & Articles of Association including:
- Redemption rights
- Multiple class rights (Founder, Executive, Member Rights)
- Tag along and drag along rights
- Exit provision
- Pre-emption rights
- Board Resolution regarding:
- Any new shares to be issued
- the exit of a shareholder/member
- the transfer of shares
- Secretary to:
- Update corporate register
- Issue and update share certificates on entry/exit of a member
- Disclose any entry/exit to the public authorities
The complex share plan is mostly used once an investor is introduced, or in private funding rounds with private investors. E.g. co working spaces business
Simple Share Plan
A simple share plan is one whic is easy to administrate and light to the pocket. I would expect it to have structure however not overwelmingly:
- Simple Share Plan
- Single class of shares
- Simple Articles, tag along and drag along rights are required
- Use of a trust to hold the shares on behalf of different members
- Entry and Exit does not require public disclosure
- Entry and Exit does not require the approval of the company board but is triggered on predefined conditions (e.g. employment termination)
The simple share plan was used by a RecTech company for 7 years before they received funding and additional investments from Uniqa Ventures and Elevator Ventures and Super Angels Club.
Harris Sharpe
Author - Photographer
For many years he has worked and devoted his skills and efforts towards building a successful career as a leading executive. From humble beginnings, his aim has always been to yield results; with a keen focus to attention to detail and client satisfaction. His experience has always been varied and not specific, at times he preferred it. With that in mind, he has dealt with CySEC on licensing and ongoing regulation, international private equity and credit fund managers, NASDAQ and NYSE listed companies occasional millionaires as well as self-made millionaires. His passion though is difficult transaction work organizing and deploying people for a common goal. Harris enjoys reading and studying the Cyprus law and sharing that information on this website.
