Why Are Employee Share Schemes Important For Startups?

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Table of Contents

• How Does an Employee Share Scheme Work?
• Benefits of Employee Share Schemes
• Things to Consider When Thinking About ESS

Employee share schemes (ESS) are a great way of attracting, retaining and motivating employees without compromising your cash flow. They can form part of your overall people strategy as they reward employee performance and align participating employees’ interests with the interests of the company. But what are employee share schemes? How do they function and what are their benefits? What should you consider as a cash-strapped startup? This article will answer these questions about employee share schemes in more detail and highlight some key considerations when you are structuring one.

How Does an Employee Share Scheme Work?

ESS are a way to give your employees a certain number of shares in your company or an option to buy a certain number of shares in your startup. You issue shares ‘on paper’ which dilutes the ownership percentage of existing shareholders, but the company is not required to hand over cash (unlike with salary or a cash bonus). If appropriately structured, you should still retain control of how your startup operates.

Benefits of Employee Share Schemes

Cash Flow

ESS are an excellent way to attract and reward valuable staff without having a direct negative cash flow impact. As you are not required to hand over cash, it is very favourable for small startups.

Behavioural

ESS align the interests of the company with the interests of the employees. They help to keep the workforce focused on the startup’s well-being as a whole rather than on themselves or a particular group (i.e. reduces infighting and promotes harmonised goals and behaviours aligned to corporate objectives).

3. Retention and loyalty

A participant employee may lose its shares or options (as applicable) if it leaves the company within a specified period. In that regard, employees are likely to stay with the company for longer to ensure they get the full value of the ESS. Employees are also usually more likely to remain with the company, as they have an interest in seeing the company do well.

Things to Consider When Thinking About ESS

1. Your Overall Business Strategy

As ESS forms part of your people strategy, it is important that they are consistent with your business strategy. You should ask yourself: what are we trying to achieve? An ESS can be a helpful way to recruit and retain star employees (without having to pay huge base salaries) and to motivate employees to work hard.

2. Engagement with Employees

ESS will work to their full potential if you keep reminding employees of their interest in the company. For an ESS to be beneficial, employees must know what they need to do for the business to succeed and see their interest in the company grow. This means you should engage with your staff, keep them informed of the areas the company is thriving in and whether there are any performance hurdles that it faces that could impact its growth.

3. Legal and Compliance Obligations

You should make sure you receive legal and tax advice before implementing an ESS as they are heavily regulated. Getting it right is important to ensure the scheme is successful and of value to you and your employees.

4. Tax Consequences

Always take into consideration tax implications that may occur as a result of implementing an ESS for both the company and its employees. There are also tax concessions that are available to startups implementing ESS providing they meet certain criteria.

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Are you a startup that needs more information about how an employee share scheme works? Need help implementing one? Get in touch with our startup lawyers on 1300 544 755.