Should my startup use an Employee Share Scheme (ESS)?
An Employee share scheme (ESS) is the offer of shares your business can make to your employee. It is also known as an employee share purchase plan, share options or equity scheme. It is used by companies to attract and motivate employees by providing them with an ownership stake in the growth of the business. ESS’s are not exclusively used by listed companies, but are implemented by companies of all sizes and across all industries. In fact, it is an effective tool for small businesses to attract quality employees if in the start-up phase and cash is poor.
How do Employer Share Schemes work?
There are a number of ways in which you can implement this scheme. The most common ways include:
- Employee remuneration instead of a higher salary
- Shares given as a performance bonus
- A salary sacrifice over a set period (e.g. 6 months), or
- A full payment up front
It is common practice for the employee not to access the shares for a set period of time (often a few years) or until a performance condition is met. This can lead to higher levels of employee productivity and increased loyalty to your company.
Are there tax benefits?
For your business to benefit from the Australian Tax Office’s (ATO)’s tax breaks it must be a private company, incorporated for less than 10years and have an annual turnover of less than $50million. For your employee to benefit from a tax break the share price must be equal or above the fair market value of a share in the company. The employee must hold the shares for at least three years and it cannot exceed 10% of the business’ capital.
Why should your business consider an ESS?
An ESS can be an invaluable tool to attract employees if you cannot afford to pay high salary packages offered by larger businesses. It also financially links your employee to the success of your business. This is highly motivating for that employee who will ensure the growth and profitability of your business. It is this motivation that is lacking with a regular annual salary.
Why should your employees consider an ESS?
It provides an opportunity for your employees to financially benefit from your company if it does well. It incentivises them to remain with your company and help it grow. It may also provide them with a chance to improve their investment portfolio. However, your employer also runs the risk of losing money if the relevant shares depreciate in value.
How to implement an ESS?
If you decide to invoke an ESS for your company, you will either enter a shareholder agreement with the employee, or sign a deed of accession in which you will agree to be bound by the terms of the shareholder agreement. If the way your equity is spread is starting to become complicated, then it is advisable to use software to manage your ‘cap table’ (rather than just a spreadsheet).
Contact us if you would like to explore options around ESS or ESOPs for your business.