The Low Down On Employee Share Schemes For Startups

employee at work in gympie

In a startup environment, it’s not uncommon to find employees who want to grow with your business regardless of the challenges that your business may be facing.

Such employees get sold to your business’ idea and want to be part of the journey as they see potential growth. For such employees, rewarding them for sticking by your side through the hardships and for their dedication by using the Employee Share Scheme (ESS) method can not only help boost their morale but keep them motivated.

Startups mainly use the ESS method. It presents them with an opportunity to allow their employees gain equity in their company. Even though ESS’s aren’t as common in Australia as they are in the North American continent (namely the USA), it’s vital for your startup to consider getting an ESS. Startups should definitely take advantage of the ESS method as they stand to benefit a lot as they are not only able to reward their loyal employees but also attract new talent while they build a brand.

Startups should weigh up whether to take advantage of the ESS method. They stand to benefit a lot as they are not only able to reward their loyal employees but also attract new talent whilst they build a brand.

As a startup, you could seek counsel from qualified and professional tax accountants who can help you determine whether your company is eligible for ESS and how to go about it.

How does ESS work?

There are certain guidelines that your company must meet in order to qualify for ESS. These include:

  • Your company shouldn’t be listed on the public exchange
  • The gross turnover should be less than $50m
  • Your company or the group of companies it’s associated with, is less than ten years old since its inception
  • Is a resident taxpayer in Australia
  • Plans to provide ordinary shares or provide alternative ways of acquiring ordinary shares or the right to acquire shares for their employees who have worked with them for more than three years

If your startup fits the above criteria, you are qualified to provide your employees with ESS.

Why would your employee want to enter into an ESS with your startup?

Most startups ideally offer a lower salary compared to the market rate offer. As such, certain factors would make your employee interested in the ESS. These are:

  1. It’s an efficient and cost-effective way for them to acquire shares which under normal circumstances, they would not have been able to obtain
  2. Allowing your employee to become a stakeholder in your startup means they become committed to the company and its success as they are shareholders and the success or lack thereof of it impacts them directly
  3. Having a stake in your business will give your employees a deep sense of job satisfaction as it’s a reward for their input. Moreover, as your startup continues to grow, so will their investment.
  4. Development of share portfolio – the minute your employee becomes a shareholder, they will be more interested in understanding the stock market and how that impacts their shares in the business.
  5. It’s very common to find disgruntled employees who feel they have no voice and as such can’t contribute to critical issues affecting the business. Allowing them to have a stake in your business guarantees them an opportunity to give their own insights on the business as a whole. Employees will also be more open to negotiating policies that affect their work environment.

So, what next?

Once you get a greenlight from your lawyer and tax accountant that your startup is qualified to provide an ESS to your employees and that they too are eligible, you can proceed to issue a letter of offer to your employee. The letter of offer is ideally short and gives a summary of the guidelines considered when entering an ESS. Below are a few things that shouldn’t miss in your letter of offer:

  • What’s the number of shares that the employee will obtain
  • Length of time they can own the options before exercising them
  • Set targets that need to be achieved or else the options get vested
  • Guidelines on what would happen if the employee ceases to be an employee of your startup

When giving the offer letter, you need to ensure that you also give your employee a form that they need to sign and the ESS laws. The ESS rules need to be clear and factor in the consequences that will happen in the event both parties don’t achieve their end of the bargain.

Bottom Line

An ESS is the best option that any startup can provide its employees when it’s still in its teething stage. Keeping your employees motivated will ensure that they do their very best for your company. After all, the success of the business means that they stand to benefit a lot more.

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