May 19 2014
Important to ensure you tick all the boxes for your employees
Employee share schemes can be a great way to attract, retain and incentivise staff. They haven’t been widely used in New Zealand, with a big part of the problem being that the rules you need to comply with to offer one make doing so impractical and, in a lot of cases, also undesirable. In April, those rules got completely overhauled. This article looks at some key points that both employers and employees should look out for when a share scheme is offered.
From the employer viewpoint
Under the new Securities Act 1978 exemption, before any of your employees participate in your share scheme you must give them a document that describes the plan, and its terms and conditions and contains a prescribed warning statement. They must also be given a copy of the latest annual report and financial statements (or a statement to the effect that these can be obtained from the company).
First things first though. The fundamental question you’ve got to ask yourself is why are you looking at offering an employee share scheme in the first place? Does it make sense for your company? How will the scheme complement the company’s business and growth strategies? How will it impact on governance and management? What are you hoping to get out of it? That will dictate the entire structure of the scheme and guide you through the key issues, including the following:
- You need to think about the type of plan you’re going to offer, and who it will be available to. There are various possible structures, each with its own legal, accounting and tax implications.
- How much of the company will be allocated to the scheme? Unless the scheme is intended to create a one-off benefit, you need to budget to cover all different types of events.
- Another key issue is the vesting rules, that is, the milestones that need to be reached before any of your employees can benefit under the scheme. And, what should happen to your employee’s vested and unvested entitlements if they resign or are terminated, or get sick or die?
From the employee viewpoint
If you’re reading this as an employee there’s plenty to think about for you too. It’s essential that you understand the benefits and risks of the scheme before committing to it, especially if your participation is going to be in lieu of part of a cash salary, which is often the case.
You’ll need to understand the type of scheme and its tax implications for you. Know how much you’re getting, what the existing capital structure of the company is, and how and when your interest will be diluted over time. Does the vesting schedule match how long you expect to be with the company? Are there any circumstances under which you can lose your entitlement? You might not be in a position to change much or any of this, but you should at least understand it before getting involved. And it doesn’t end there either. The value of your entitlement changes over time with the fortunes of the company and as additional capital is raised. It’s important to try and stay on top of what’s happening in order to be able to assess the value of your entitlement at any time.
For employers, having an employee share scheme can be a very good way to attract, incentivise and reward your staff. For employees, joining a share scheme can be a good way to be rewarded for your hard work. Before signing on the dotted line, however, we’d recommend that you make sure you get some independent legal advice.