Employee Share Schemes for Start-Ups

[ Inviting your employees to grow with your business ]
by Hans Nimb Published

Your company has hit the ground running. You can see that there is a fantastic opportunity to continue its growth and you have an excellent team working for you. If you want to reward your employees for their commitment during the difficult early stages of your company’s development in a unique way, maybe it’s time to consider an Employee Share Scheme (“ESS”).

An ESS is a method used by many start-up companies to provide employees with a means of gaining equity in the company they work for. Whilst ESS’s are not as common here in Australia as they are in North America, they are definitely worth considering. For many entrepreneurs and start-up companies, this would be a very useful mechanism to reward loyalty to current employees and a great incentive to prospective employees as your company develops over time.


HOW DOES IT WORK?

First, you must establish whether your company is eligible to offer an ESS. So long as your company:

1. is not listed on public exchange;

2. has an aggregated turnover of less than $50m;

3. is less than 10 years old or the associated group of companies of which it is a part of are less than 10 years old;

4. is an Australian tax paying resident; and

5. intends to offer ordinary shares or options to acquire ordinary shares or rights (including options) to acquire shares to employees with more than 3 years of service,

you are eligible to offer an ESS to your employees.

WHY WOULD EMPLOYEES WANT TO ENTER INTO AN ESS?

There are a number of key benefits for employees of start-ups to consider entering into an ESS. Those being:

1. it is a tax efficient way of acquiring shares which they may otherwise not have the ability to acquire;

2. if an employee holds an equitable stake in the company they work for, they are more likely to develop a stronger sense of commitment to the company as they would have a personal stake in success of the company;

3. employees will likely have a greater sense of job satisfaction as they would be able to see a tangible reward for effort. As the company grows, so will their capital investment;

4. employees will develop a better understanding of the stock market and how it affects their shareholding in the company. This introduction in the stock market and continued involvement can lead to employees developing their own share portfolio; and

5.employees often feel like they do not have a voice as they do not have a say in the company. However, as a shareholder, they can have a level of input in the development of the company. Also, because of this new relationship, employees will have increased flexibility and choice when negotiation workplace arrangements.

WHAT ARE THE NEXT STEPS?

Once you have been given the all clear by your accountant and lawyer that your company is eligible to offer an ESS and your employee is eligible to enter into an ESS, you can finally provide a letter of offer to the employee. The letter should be relatively short and gives a brief summary of the key terms of the ESS. Some examples of items to address in your letter are:

1. how many shares the employee will receive;

2. the period of time the employee can hold onto the options before exercising them;

3. targets that must be reached which if they are not will lead to the options vesting; and

4. what happens in the event of the employee ceasing their employment with you.

Along with your letter, I recommended that you also provide a prepared acceptance form for the employee to sign and the ESS rules. The ESS rules should be extremely detailed and cover all aspects of the relationship and provide clarity regarding when and how the options are exercised and what happens if they are not or the employee decides to leave the company.

CONCLUSION

An ESS is a fantastic incentive for employees to really go that extra mile for your company. At the end of the day, the stronger and more successful the company is, the greater the reward is for them. If you think that your company is potentially in the position to offer an ESS to your employees, feel free to contact us to discuss your options.

Hans Nimb
read more by Hans Nimb
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