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How to make employee share schemes work for your business
April 20, 2020

Employee share schemes have been used for many years to reward and incentivise employees by giving them a stake in the business. As they continue to rise in popularity in New Zealand, you may be wondering how to make employee share schemes work for your business?

There are different ways to incentivise your employees through share schemes, but two more common incentive structures are:

Basic share schemes

The employer sells or issues shares to an employee, either unconditionally as a reward for past service (Unconditional Share Issue), or with “vesting” conditions, which relate to their future performance (Conditional Share Issue).

Employee share option plans (ESOP)

The employer will grant an employee the right to acquire shares at a future date. In some cases, this will be subject to the satisfaction of certain conditions.

Benefits of these schemes include attracting and retaining key staff members, implementing a succession plan and rewarding staff performance, without impacting on the business’s cash flow or working capital position.

Until recently, New Zealand legislation made it hard for businesses not listed on the NZX to offer shares and share options to their employees. In contrast, the current Financial Markets Conduct Act 2013 and related exemption make it much easier for businesses to set up the types of schemes that have been common practice for many years in Silicon Valley.

For a private business, the rules about buying and selling shares are set out in the business's constitution and in the Companies Act 1993. It is quite usual for a business's constitution to contain "pre-emption" rights, requiring shares to first be offered to the existing shareholders before they can be offered to non-shareholders. The purpose is to maintain the ranking of existing shareholders so that their voting and distribution rights are not diminished. These provisions will need to be revisited when an employee share scheme is established. However the business may still want to keep tight control over who can purchase the shares.

Private market for individual businesses

While employee share schemes are becoming increasingly popular, some businesses struggle to manage a large number of shareholders and employees are unable to get value from their shareholdings, unless they are able to sell them.

Catalist offers a private market and registry service, which simplifies employee share scheme management and allows employees to trade shares amongst themselves. Trading is conducted using regular periodic auctions, only accessible by employees.

Pre-emption rights can safely be disapplied for auctions as all existing shareholders are able to participate and have an equal ability to purchase any shares offered for sale.

In the absence of a fair mechanism for employees to trade their shares, a shareholders’ agreement may spell out the sales process to be followed and how shares are to be valued. However, often shareholders within private businesses have difficulty getting an agreement on share price or finding someone to trade with. Managing this process can be time consuming for senior management. To make this process easier, Catalist’s platform fairly calculates the price to be paid for shares, based on the supply and demand from buyers and sellers. The platform also provides full visibility to the employees of any uploaded business financial information.

Thinking longer term? Catalist will be able to expand trading of shares into a public market, which your business can transition to if looking to raise public capital at a later date. More information on our markets can be found here.

If think you’d like to set up a private market or employee share scheme for your business, please contact us today.

By Michelle Polglase