Employee share schemes (ESS) are a great idea to better align employees’ interests and the financial interest and performance of a business. These schemes allow eligible employees to purchase or acquire shares or employee share options (where employees are given the option to purchase shares at a later date or upon achieving certain key performance indicators).
Subject to meeting certain conditions, start-ups are eligible to offer employees shares at a discount of up to 15% without having the employee liable to any upfront tax. Under the start-up ESS rules employees can only acquire up to 10% of the equity interest in the company and the ESS must be offered to 75% of the employees. For companies to benefit from the tax exemptions offered to start-ups certain requirements must be met:
- The turnover of the company must not exceed $50 million;
- The company is not listed on the stock exchange;
- The company is an Australian for tax purposes;
- The company has been incorporated for less than 10 years;
- Shares acquired under the ESS must be ordinary voting shares;
- Securities acquired under the ESS must be held for no less than 3 years;
- To the extent options are involved, the price must be based on the fair market value of the share on the date the company grants the option.
Benefits of Employee Share Schemes
1. Attracting top quality staff
Start-ups could utilise ESS to attract good employees with a lower salary when cash flow is not so readily available. High quality more senior employees may expect equity incentives as part of their package.
2. Retaining high performers
Equally as important as the ability to attract top quality staff is the ability to retain them. ESS is a great incentive as employees would think twice before leaving if they stood to walk away from something that is valuable. This is a great way of protecting a company from the risk of having strong performers poached by other firms.
3. Employees having a stake in the performance of the business
This could help change the way people think and behave. A person who owns a meaningful stake within a business is likely to act differently to someone who does not. Decisions made by employees with a stake in the company will align more with the objectives and goals set of the founding shareholders.
4. Potential tax efficiencies
It is important to ensure that specialised legal and tax advice is sought at an early stage to ensure employees benefit from available tax concessions (see above). Further, there are complex disclosure and licensing laws which may apply and legal advice should be sought in relation to these laws and potential exemptions. Offers made to employees must be in writing and should contain all prescribed information.
Contact Allied Legal
A specialised legal adviser can guide you through the complex rules, formalities and options available when setting up ESS. Allied Legal’s start-up lawyers in Melbourne regularly assist entrepreneurs and start-ups and take great pride in seeing them flourish. We provide free 30-minute initial consultations to help understand your needs. Please contact us when you are ready to seek specialist advice: http://alliedlegal.com.au/contact/.
