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Equity Based Incentives Trinity Research & Innovation

Equity Based Incentives Trinity Research & Innovation. Niall Kavanagh- Elan Corporation plc Cormac Brown - MASON HAYES & CURRAN. Terminology. Equity Incentives. Foundations. Perfect Storm. Equity Awards. Cliché. Cash Burn. Burn Rate . 3 Funding Rounds Less Dilution. Cash. Funding

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Equity Based Incentives Trinity Research & Innovation

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  1. Equity Based IncentivesTrinity Research & Innovation Niall Kavanagh- Elan Corporation plc Cormac Brown - MASON HAYES & CURRAN

  2. Terminology EquityIncentives

  3. Foundations

  4. Perfect Storm Equity Awards

  5. Cliché

  6. Cash Burn

  7. Burn Rate • 3 Funding Rounds • Less Dilution Cash Funding Round 1 Inflection point FR 2 FR 3 FR 4 Time

  8. Leaving

  9. Introduction • Finance Act 2011 changes • Taxation of share schemes • Types of scheme • Saving tax? • Restricted shares • Questions

  10. Finance Act 2011 changes • Overview • Employer now responsible for PAYE on share awards • Share options – employee pays directly • Employee’s PRSI extended to share awards • Universal Social Charge due on share awards – 7%

  11. PRSI – current situation • No employer PRSI • No employee PRSI on historic grants – 2011 only • Share awards and share options • 2012 no employee exemption

  12. Schemes affected • All schemes which involve the granting of shares to employees • Stock options • Restricted Shares • Restricted Stock Units (RSU) • Employee Stock Participation Plans (ESPP) • Long Term incentive Plans /LTIP locked in Shares with vesting • Free Shares • Share Matching Plans

  13. Employee Equity Incentive Awards • Value of shares taxed as benefit-in-kind • Value of share = amount liable to tax • Share options – profit on exercise • Restricted stock units – value of shares on vesting • Capital Gains Tax on disposal • Income tax / CGT – 52% v 30%

  14. Share Schemes – Current Position

  15. Revenue approved • Save As You Earn • Approved Profit Sharing Schemes • Approved Employee Share Ownership Trust (ESOT)

  16. Revenue unapproved • Share Options • Restricted Stock Units (RSUs) • Phantom Share Schemes • Restricted Shares • Sale Share Plan • Joint Ownership Plan (JSOP) • Growth Shares • Deferred Convertible Shares

  17. Share Options/RSUs • Entitlement/promise of future share • Very popular – U.S. /tech firms • Retention/performance criteria can be used • Flexible • Easily understood • Disadvantage – income tax 52%

  18. Tax = 52% Tax = 30%

  19. Share awards • Classic issue – how is tax liability financed?? • Options – exercise to sell • RSUs – vest and sell • 52% Income tax on gain • Best result = gain liable to CGT 25% • Get share low and sell high • Value grows into share over holding period

  20. CGT treatment – 25% • Employee needs to own share • Bad leaver provision • Income Tax on acquisition – issue • Start up companies – value of shares • No/low value, no/low tax • Established companies • Minority discount – up to 90%?? • Different share classes

  21. CGT treatment • Aim – suppress value on acquisition • Sale shares • Participate in proceeds on sale. • Growth shares • Value grows into shares on meeting defined targets • Anti-avoidance issues • “Beauty” of restricted shares

  22. Restricted shares - clog • Beauty • reduces cost on acquisition • CGT on exit • Agreement to restrict share transfer = tax reduction • No sale/transfer for restricted period • Income tax/PRSI on taxable amount • Very beneficial relief, no firm wide requirement • No statutory approval required

  23. Restricted Shares Restricted shares – reduction in taxable value of shares where held for specified period. Holding Period Years Reduction 1 10% 2 20% 3 30% 4 40% 5 50% >5 60%

  24. What Next “… Through the promotion of employee share ownership we firmly believe that EFI can play a central role in restoring competitiveness to the Irish economy. It is our intention to maintain this focus and ensure that the benefits of employee ownership and commitment align with Government strategy in navigating through these unprecedented economic times” Chairman Irish ProShare Association

  25. Dilution Trumpet • Deal with the dilution caused by funding rounds • Keep team motivated when scaling the business • Can “re-flate” with share options • The tax currently arising on exercising is twice that arising had the shares been directly owned

  26. Membership • Open to all those interested in Employee Share Incentives • Several classes • Corporate membership • Company/service provider membership • Individual membership (academics and students) • LinkedIn group - www.linkedin.com • Website - www.ipsa.ie • Membership Drive • Need Members • Flexibility • More members the stronger the voice

  27. Cormac Browncbrown@mhc.ieNiall Kavanaghniall.kavanagh@elan.com

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