• It is becoming increasingly common for companies to award key consultants and other service providers with shares or share options, irrespective of the fact that they are not employed by or hold office with the company.
  • Share participation can be seen as a way of motivating and retaining consultants and other service providers who can help to generate growth in company value, aligning their interests with those of shareholders.
  • There are a number of taxation and legal issues arising from offering shares or share options to consultants and service providers.
  • Consultant shares and share options are flexible and can be designed to meet the specific objectives for the company in question. 

Outline

Share or share option participation in companies by non-employees is an increasingly common occurrence, just as the number of individuals who provide services to companies as self-employed consultants or through personal service companies has increased.  

Many companies recognise the potential benefits of offering consultants shares or share options with a range differing motivations for offering shares to non-employees.  

In the same way as for employees and directors, incentives for consultants and service providers can take the form of either:

  • an issue of new shares;
  • a transfer of existing shares; or
  • a grant of an option to acquire shares.

As in the case of employee incentives, the decision as to which is the best form of incentive will depend upon a number of factors, including:

  • shareholder attitudes to creating (additional) minority shareholders;
  • shareholder and business goals;
  • the objectives behind the share incentive – with the emphasis upon reward for services already provided, retention and motivation being all key points to consider;
  • how and when value can be delivered to the consultant/service provider from their share interests;
  • the taxation implications of shares and share options; and
  • the valuation of the shares at the relevant time.

There is significant flexibility in terms of how arrangements can be structured for consultants and service providers with scope to meet the desired commercial objectives.

Benefits

As in the case of shares or share options offered to employees, offering key consultants and service providers shares or share options can help to retain and motivate those non-employees to generate growth in company value, aligning the interests of shareholders with those service providers.

Shares or share options can also have a role to play where a company has limited cash with which to pay a consultant or service provider. This can be particularly effective for smaller growth companies or start-ups where cash availability might be limited but the potential for share upside is significant.

Share or share options can also be used as a means of the company accessing finance with the consultant being asked to acquire shares for value.

There is significant flexibility in terms of structuring; with consultant shares or share options being capable of being designed to meet the required business goals.

Consultant shares/share options can therefore be structured so as to act as:

  • a reward for services already provided;
  • a retention tool – to maintain the relationship between the consultant and the company for the future; and
  • an incentive – potentially with individual or corporate targets to link the return to the consultant with performance over time.

Disadvantages

Unlike incentives for employees and executive directors, there are no specific tax breaks for shares or share options awarded or granted to consultants and service providers.

With careful structuring however the tax costs of any arrangement can be effectively managed.

There is a concern that awarding shares or share options to a consultant or service provider could be seen by HMRC as being indicative of an employment relationship.

While such a view may have historically been more relevant, share participation is only one factor in determining status. The key will therefore be whether in reality a self-employment or employment relationship exists based upon the normal badges of employment.

Unlike employees share schemes, certain legal exemptions are not afforded to awards of shares or the grant of options to consultants and service providers. Care should therefore be taken in the structure of the arrangements as well as the content of documentation relating to the shares or options. 

How we can help

We design, draft and implement share and share option arrangements for consultants and service providers, covering relevant tax and legal issues.