CIC Association

Serving Community Enterprise

How do we treat people who invest time instead of cash and what about EIS and options schemes

The CIC regulator felt unable to answer some of our questions. i wonder if you are in a position to share experiences and knowledge on this matter.

The situation is as follows
  • We have a number of people involved in setting up the CIC who are investing in one of two ways
    • people who will contribute cash in return for equity 
    • people who will provide their time in return for equity instead of charging for their services. 
  • We intend to pay dividends in line with the guidelines over time once the CIC is generating profits
  • We have a CIC but we have yet to issue equity and plan not to do so until after April 2010
Our questions are
  • Will people who invested their time in return for shares be entitled to dividend payments in the same way as a person investing cash (Nominal paid up value plus premium per share at point of investment drives the dividend calculation, as confirmed by regulator).  
    • Many of our team have experience of this approach in normal commercial start ups where it is termed sweat equity. The equity they are granted is identical in every way to equity sold for cash.  Is that the same within a CIC equity model.
    • We believe that we may be required to structure the process as several transactions within the CIC e.g. person invoices for services, CIC pays for services in equity at an agreed price which is then the driver for dividend payments.
  • Whether an investment made in a CIC is eligible for EIS relief as defined by HMRC -
  • Whether an investment made by management in a CIC is eligible to be part of an Enterprise Management Initiaitive
  • Is it possible to create other share option schemes within a CIC for employee
  • Is it possible to provide a Share option / Warrant scheme within a CIC - primarily in relation to providing incentives for employees, directors, partners and suppliers
We see this is a major area for clarification as it will dramatically affect our ability to get investment into the CIC over time as it develops and grows.

Many thanks

Views: 361

Replies to This Discussion

Hi David,
You raise a huge range of issues here.
It is a limitation of the CIC form that it cannot reward 'sweat equity' in the way an ordinary share company can - I raised this in my original response to the CIC Consultation on behalf of Social Firms UK 6 years ago now, and again in the recent 'cap consultation' - take a look here. This is an ethical issue for social enterprise: those without wealth who invest their time OUGHT to receive rewards on a par with those who can invest cash.
The route you suggest will work BUT will involve less favourable tax treatments than cash investors, so it's still not fair.
You are in untrodden territory with the application of the EIS and various HMRC approved share schemes to CIC shares - but I believe these are possible if the CIC shares are ordinary voting shares, and it may well be worthwhile now that the caps have been lifted. I'll write more on this as soon as I have time!
Much appreciated insights and advice. we are at as pivotal point and therefore getting this right it is essential. I look forward to your further posts :)
Geof is correct - you could pay them cash which they use to buy shares with, but this is not tax efficient and may cause all sorts of VAT issues too.

There is nothing in the CIC model that makes it ineligible for EIS relief (I assume we're talking a CIC Ltd by Shares here). You'll find my guidance on this topic here:-

You ask Whether investment by management can quaylify for EMI - EMI is a scheme to effectively give shares in a company at a cheap price to management, so the investment side of this is small, so I don't see the point?
If you mean Can EMI by used by CICs? I do not believe their is anything within the EMI rules which stops CICs using them (I haven't read the detail, but the broad conditions are the same for EIS), whether there is something within the CIC rules that stops them using EMI might be different.
Going from first principles, the concept of the asset lock is to ensure assets held or created for social benefit remain to be used that way - assets cannot be sold at under-value by a CIC and cannot be distributed in a winding up (subject to the new rules). Therefore I would strongly argue that if the EMI (or any other share option scheme) is what would be done on the open market, there should be no problem. I am not a solicitor, however.

Another options is to use a Phantom Share Scheme - where you essentially pretend you're giving them shares and use it as a way of paying performance related pay. This is not as tax efficient, but as long as this is set up in a way that would be in the open market it should not breach the asset lock (as nothing is being done at under market value). I know bonuses are a sore topic for many of us, but there is nothing ethically wrong with correctly implemented & calculated performance related pay.

If you need advice on share schemes, the Employer Consultaing team in my office will be able to help, for a suitable fee ;-)

If you're planning on doing this in a major way (with many share options and outside investment) I'd consider setting up a partial subsidiary which is not a CIC, into which the investment goes. You then avoid all the hassle but should get the ethical buzz of having a CIC involved.
Alistair, thank you for your input and advice, much appreciated, I have also taken advantage of downloading you slides on EIS for CIS, i would really like to keep in touch

Hi folks. I just posted a new discussion on rewarding start up sweat equity and buying a self employed business by converting it to a CIC. Your thoughts would be very welcome.... thanks!



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