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Employee Share Schemes

Introduction

Employee share schemes (ESS) or more frequently referred to as an Employee Share Option Plan (ESOP), are tools used by business owners to grant eligible employees the opportunity to acquire shares or share options in the company they work for.

Usefull tools to incentivise top talent within your organisation, employee share schemes come in different shapes and forms and early stage companies commonly use schemes like these, as they might not have the working cashflow to pay competitive salaries.

 

These schemes additionally play a valuable role in alligning employee and shareholder interests, ensuring employees feel part of the business, that they get onboard with company goals and assists in boosting overall workforce morale.

 

Shares could either be offered directly to participants or through the granting of an option (which becomes exercisable at a future event) to acquire these shares through a share purchase plan. Some business owners even opt for a ‘phantom share scheme’, which essentially means participants receive notional units tracking the value of an uderlying share in the company. This allows the holder of the notional unit to receive the value derived from the underlying shares (either upon a declaration of  dividends or another liquidity event) but the company not relinquishing any voting and control rights associated with offering actual shares in the company to its workforce.

 

What should I consider when structuring my ESS?:

  • Which employees will be eligible? Full time? Part-time? Advisors? C-level employees?
  • What type of scheme is right for the business, its culture and ethos? Direct shareholding (granting employees a direct shareholding in the company)? Options (should I rather grant my employees options to acquire shares in the future)? Notional shares (notional shares, sometimes refered to as phantom shares aren’t real shares in but rather notional units tracking the value of an underlying share)?
  • How will the employees (or the company) pay for the shares? Will a discount to actual market value be applicable?
  • Will the shares or options be subject to vesting conditions? (‘vesting’ means that employees will only receive the benefit of the shares, options or units after a minimum period of service have been served.)
  • What will the tax consequences be when awarding these shares to employees?
  • What happens with the shares, if the employee employment is terminated or resigns?
  • What happens if the company is sold or acquired?

 

What do I need to create an ESS?:

An ESS is a formal company policy, authorised and approved by the shareholders of a company and implemented by its board of directors.

To formalise your ESS, you will need:

  • a formal policy document, that set out the eligibility requirements and terms of the scheme. This document will generally include the governance details, vesting conditions, disposal rights and employee obligations;
  • a written offer document inviting an employee to join the scheme;
  • a written acceptance document (and clear procedure), detailing each employees’ acceptance of the offer and agreement to be bound by the scheme policy terms and conditions;
  • director and shareholder resolutions authorising the implementation of the scheme; and
  • evidence of the issuing of the shares, granting of the options and/or notional units.

 

It is essential when implementing an ESS to ensure the structure is sound, all legal documentation are properly drafted and the tax treatment have been carefully considered.

If you have any questions or would like any assistance setting up your custom ESS, get in touch! 

 

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