There are different types of Employee Share Ownership Plans that will suit different businesses. The main options include:
1. Call Options
Call options create a contract between the company and employee, which obliges the company to issue new shares to the employee in the future at a specific price and time frame specified by the contract.
This type of contract can benefit employees in that it allows them to participate in the upside of share price increases without having to outlay the capital to purchase the shares. Call options are also common where the future of the company is still hard to predict.
It benefits the company as it aligns the employees to the objective which will increase the share price, provides remuneration that doesn't require cash and provides some risk mitigation as shares are unlikely to be issued when there has been no share price appreciation.
To create the ESOP, the Company will sign an Employee Share Option Deed. This will set out the terms of the scheme, who may participate and how the scheme will be operated. Participants will acquire their options by signing an invitation letter sent by the Company.
Share options are traditionally earned through longevity in the company and/or performance milestones. Share options will normally defer the tax payable by the employee until the point the options convert to shares. Eventual tax implications for the employee can be aligned with the employee's opportunity to sell the shares when it will be easier to find any tax payment.
Early-stage investors will often request that an ESOP is implemented prior to their investment, as they recognise their potential value for the company. More mature companies can also benefit from an ESOP when they are heading toward a sale or liquidity event.
2. Share Trust Scheme
A Share Trust Scheme will allow a company to issue or transfer shares to a wholly-owned subsidiary trustee of the Company who will hold those shares on trust for the benefit of participants in the Scheme. Participants will not hold the legal title to their Scheme Shares, but rather a beneficial interest.
Employee Share Trusts will typically be used to immediately 'sell' ownership of shares to employees. Often favoured by more established companies, a Trust entity can be established to hold shares for employees in the parent company.
Typically businesses will either offer a low or no-interest loan (or a bonus payment) to fund the purchase of the shares. Loans will often not require repayment until such time as an eventual liquidity event in the company.
3. Phantom or Bonus Share Schemes
A phantom share scheme will provide Participants with a contractual right to a monetary amount on certain events occurring or certain KPIs being achieved.
"Phantom" share schemes create some of the benefits of formal share ownership without requiring the physical transfer of shares or options. Often favoured in businesses with a strong profit share focus, Phantom schemes allocate 'shares' to employees who will get a cash bonus based on their 'ownership' when dividends are calculated and/or a liquidity event occurs.
Whilst the Orchestra team is always available to discuss the right method of Employee Share Scheme for your business we also encourage conversations with your lawyers, accountants and other suitable professional service providers.
Contact us if you would like to learn more about Employee Share Schemes.