Hi Everyone, I'm working through a few details on employee share/option schemes at the moment. I've been doing a bunch of reading so far, but I was really keen to hear from people who've actually been through this stuff, and what advice/recommendations they have.
Issues: * Company is private, and may remain that way into the future, so options schemes based around discounts to market price on a traded stock are less relevant/appealing because the scheme can't count on the shares/options being in a liquid market. * The business is on a strong growth trajectory, so the value of these shares - and the motivation the company is seeking from making staff shareholders - is going to come from increasing the capital gain, as well as earning dividends (especially if the company remains private and profitable). The problem though is that directly granting share ownership now results in both a CGT event for the company and a personal income tax obligation for the employee, which is hard to swallow since we're dealing more with potential incomes here, and taking cash out of the pocket of either the company or the employee - especially in the current economic climate - is not going to work. * Any plan/allocation needs to be able to handle the addition of more people down the track as the business grows in staff and needs to bring on additional high-powered and high energy staff who will need this sort of incentive to come on board. * The scheme will ideally conform to a 'conventional' approach so if external investors/capital raising is required, the due-diligence phase surrounding the scheme will pass with a "yeah, that's pretty standard; we'll just have our people review the contracts/deeds to make sure". >From my reading so far about the ways this sort of thing happens: * It is fairly common for private, fast growing tech companies to allocate a pool of around 10% of equity to a scheme. * In the Australian tax scene, taxes like FBT, workcover costs (and hopefully payroll tax) for the company, and income tax for the employees, can be overcome/deferred through the use of a Trust. * These Employee Option Share Trust or an Employee Share Trust are in effect a Unit trust where the deed of the trust controls things like vesting and rights. In these scenarios, the company provides the employees, through the trust, an interest free loan to buy the Units in the Trust, which in turn owns the options/shares. * There are exempt employee share/option plans available, but they are capped at $1000 per annum, and they have to be offered to 75% of employees without vesting or discrimination on rights. This won't give the company the flexibility it needs to go after executive rock-star talent as required into the future. So, getting to the key questions: * If the share pool is 10%, what happens 2x years down the track when you bring someone new on and want to make them part of the scheme? If the pool isn't over-subscribed, then that is easy - you just allocate a slice, probably at a new and higher valuation, so the $ value of the slice results in a lower %. But what happens when you do exhaust the 10% pool? Is the answer increase the size of the pool - this could be problematic if investors have come on board and the stock in the founding shareholder's where this encroachment would come? Is the answer instead to revalue by issuing new stock, thereby diluting existing staff in % terms? If the later, how is this handled to make sure they don't in effect get "ripped off" since they've been working hard to increase the valuation of the company through their efforts? * What are the conventions with vesting in the industry? I've heard it is common to vest over 5 years, which makes sense. What are the rights of someone who's been around for 2 years: do they commonly have rights to 40% of the holding? * Is it common for a company to "allocate" shares/options up front and vest them out over 5 years, or is it more common for a company to allocate a parcel in year 1, and then another parcel in year 2, and then another parcel in year 3. If so, does the valuation normally change through that time period for a given staff member? Sorry this email is so long! From the work I've already done, it is pretty damn complex, and while I know that no-one on this list is my lawyer - and professional advice on all this is necessary and already being sought - I was hoping that some insight/guidance on what's standard in our industry, and how the dilution aspect is dealt with over time could, combined with legal advice, help get a great result in what's surely for most/all tech companies, their most important relationship: the one they have with their staff. Geoff --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Silicon Beach Australia mailing list. No lurkers! 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