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In the life sciences sector, innovation is critical to commercial success, but attracting and retaining the talent needed to drive that innovation remains a significant challenge. In a sector characterised by long development cycles, competition for skilled employees and ongoing funding pressures, many private companies are increasingly turning to equity-based incentives, share options and tailored retention arrangements to align employee interests with long-term business objectives.
When structured effectively, these strategies can motivate key personnel, reward performance and help create the stability and commitment needed to drive growth and bring innovative products and services to market. For many early-stage life sciences companies, equity participation can also be an effective recruitment tool where available cash is being prioritised for research, development and commercialisation activities.
With a range of incentive structures available, selecting the most appropriate mechanism requires careful consideration of a company's stage of development, funding position, shareholder expectations and retention objectives. From tax-advantaged share option plans and growth shares to bespoke retention arrangements, each approach offers distinct advantages and challenges.
The following sections consider some of the incentive arrangements most used by UK life sciences businesses, together with the key commercial and legal issues that arise when implementing them.
Enterprise management incentive (EMI) scheme
EMI options are tax-advantaged share options available to qualifying companies and offer a high degree of flexibility for employers. EMI options typically have specified vesting conditions, a fixed exercise price and a set maximum number of shares which may be acquired under the option.
While the exercise price can be set at any level, granting options at a discount to market value may give rise to adverse tax consequences. Companies will therefore commonly agree a valuation of the underlying shares with HMRC before making grants, helping to ensure that options are granted at market value and that the relevant EMI limits are not exceeded.
One of the principal attractions of EMI options is the potential for favourable tax treatment for both employees and companies, provided the relevant statutory requirements are satisfied. The tax treatment will depend on the particular facts and circumstances, but employees may benefit from capital gains tax treatment, rather than income tax treatment, on gains realised on shares acquired through EMI options, and Business Asset Disposal Relief may also be available. Companies may also be entitled to corporation tax deductions in certain circumstances.
Qualifying conditions apply to both the company and the employee. These include requirements relating to the size and nature of the business, employee working commitments and the overall value of options that may be granted. Certain limits are increased for qualifying knowledge-intensive companies. Given the technical nature of the legislation and the potential tax consequences of getting it wrong, specialist advice should always be sought when determining eligibility.
EMI schemes must be registered with HMRC and annual returns are required. One of the principal advantages of EMI options is their flexibility. Companies can determine when options vest and become exercisable, whether by reference to continued employment, performance milestones or an exit event.
Companies will typically establish a set of overarching EMI scheme rules dealing with matters such as leavers and option exercise mechanics, streamlining future grants, while bespoke terms such as vesting periods and exercise prices are incorporated into individual option agreements.
Given the potentially significant tax advantages and flexibility available, EMI options are often the preferred equity incentive arrangement for qualifying growth companies. They can be a powerful tool for attracting, incentivising and retaining key personnel while aligning employee interests with the long-term success of the business.
Growth share scheme
Growth shares are designed to incentivise key employees by allowing them to participate only in the future growth in value of a company. Unlike ordinary shares, growth shares are typically issued with a hurdle, meaning they will only acquire meaningful value once the company exceeds a specified valuation threshold.
As a result, employees participate in future value creation without sharing in value generated before they joined the equity structure.
For example, where a company has a current market value of £10 million, a hurdle of £12 million may be applied to the growth shares. In that scenario, the growth shareholders would only participate in the increase in company value above £12 million. If the hurdle is not achieved, the growth shares may have little or no economic value.
Participation above the hurdle can be structured in several ways, including by reference to a fixed percentage, a pro rata entitlement or a ratchet mechanism under which participation increases as further performance thresholds are achieved.
Growth shares are typically issued at market value at the date of allotment, taking account of factors such as the hurdle, restrictions attaching to the shares and any associated hope value. Employees will commonly enter section 431 elections within the required timeframe, although the tax treatment will ultimately depend on the particular facts and circumstances.
Careful consideration should be given to the level of the hurdle and the extent of employee participation above it. A hurdle that is set too low may deliver value without requiring significant growth, while a hurdle that is set too high risks undermining the incentive value of the arrangement.
Growth shares are often structured so that value is realised on a sale of the company or other exit event, although alternative liquidity mechanisms can also be implemented where an exit is not anticipated. While growth shares are often non-voting, dividend rights may also be attached to them, often becoming effective once the hurdle has been achieved.
Companies should also ensure that appropriate leaver provisions are included in their constitutional documents to facilitate the transfer, purchase or cancellation of growth shares held by departing employees.
For many founder-led and investor-backed businesses, growth shares often strike an attractive balance between incentivising management and managing dilution.
Company share option plan (CSOP)
A CSOP is a tax-advantaged share option arrangement under which a company grants options to selected employees and full-time directors to acquire shares at a fixed exercise price, typically set at market value on the date of grant.
If the company's value subsequently increases and a sale or other liquidity event occurs, the option holder can exercise their options and acquire shares at the pre-agreed exercise price. Depending on the circumstances, and provided the relevant statutory requirements are satisfied, an increase in value may benefit from more favourable tax treatment than would generally apply to a cash bonus.
CSOPs are subject to several qualifying conditions, including requirements relating to eligible participants, the type of shares over which options may be granted, maximum individual participation limits and minimum holding periods before exercise.
Failure to satisfy the applicable requirements may result in the loss of favourable tax treatment. Care should therefore be taken to ensure that options are structured appropriately from the outset.
Given their focus on employee retention, CSOPs commonly include vesting periods requiring employees to remain in employment for a specified period before options become exercisable. Options will also typically lapse when an employee leaves employment, subject to any agreed leaver provisions.
For companies that do not qualify for EMI options, or that require additional option capacity, CSOPs can provide a useful and tax-efficient alternative.
Phantom awards
A phantom award is a cash-settled incentive arrangement under which employees are granted a contractual right to receive a payment linked to the value of shares in the company.
Upon a specified realisation event, such as a sale of the company or the achievement of predetermined performance targets, the employee receives a cash payment equal to either the value of the relevant shares or the increase in value of those shares, depending on the terms of the award. In effect, phantom awards allow employees to participate in increases in company value without becoming shareholders.
As employees do not acquire shares, phantom awards avoid dilution of existing shareholders and remove the need to manage additional minority shareholders. This can make them particularly attractive where founders or investors wish to preserve the existing equity structure or where a company wishes to incentivise employees without issuing shares.
However, phantom awards do not generally attract the same tax advantages as certain share-based arrangements and payments will typically be taxed in a similar way to cash bonuses.
Unlike equity-based arrangements, phantom awards do not involve employees subscribing for shares and therefore do not generate any capital contribution to the company. Instead, the company must fund the relevant cash payments when awards crystallise, which can create cashflow considerations where significant value has accrued.
For companies seeking to incentivise and retain key personnel without diluting existing shareholders or altering the company's equity structure, phantom awards may be particularly attractive.
Cash-based retention arrangements
While equity incentives often provide the strongest alignment between employee and shareholder interests, cash-based retention arrangements can also play an important role.
Retention bonuses linked to service periods, fundraising milestones, regulatory approvals or exit events can provide a relatively straightforward means of incentivising key employees without affecting the company's share capital or ownership structure.
Although such arrangements do not typically benefit from the tax advantages associated with certain share-based incentives, they can still be an effective means of retaining key personnel through important stages of a company's development, particularly where equity participation is impractical or undesirable.
Additional considerations
In addition to tax efficiency and employee retention objectives, companies should consider the wider corporate and transactional implications of any incentive arrangement.
Companies should ensure that their articles of association, shareholder agreements and any investor consent rights are reviewed before implementation. The treatment of employee participants should also be considered in the context of future fundraising and exit transactions.
Employee shareholders will typically be required to comply with transfer restrictions, drag-along provisions and other terms contained in the company's constitutional documents. However, unlike founders and management shareholders, employee participants would not typically be expected to provide substantive business warranties to a purchaser on an exit.
Thoughtful planning at the outset can help ensure that employee incentive arrangements support future fundraising and exit activity rather than creating unnecessary complexity during due diligence or transaction execution.
How A&L Goodbody can assist
At ALG, we regularly advise scaling businesses on the design and implementation of equity incentive and retention arrangements.
Our experience includes advising on share option plans, EMI schemes, growth share arrangements and other bespoke incentive structures, together with the associated corporate governance and transactional considerations.
By working closely with management teams, investors and shareholders, we help businesses develop incentive strategies that align stakeholder interests, support sustainable growth and position them to attract and retain key talent.
For further information in relation to this topic and how we can assist, please contact Catherine Irvine, Andrew McClintock or any member of the ALG Northern Ireland Corporate and M&A team.
Please note that this article is intended as a high-level summary only and should not be construed as legal or tax advice. Specific advice should be sought before implementing any equity incentive arrangement. Tax treatment will depend on the particular facts and circumstances and is subject to changes in legislation and HMRC practice.
Date published: 14 September 2026
