An essential tool for setting up an ESOP.
This checklist will help you better understand the process of setting up an ESOP, and make sure you are asking the right questions and thinking about all key considerations.
Whereas share schemes may see participants being rewarded through dividends, option schemes are typically more focused on future capital growth.
In some cases, options will not be capable of being exercised until there is an exit event (such as a business sale or an IPO).
The key elements of an employee option scheme are:
There are a variety of commercial and tax considerations that need to be taken into account in designing an option scheme.
The vesting period in an ESOP is the initial period when participants do not have access to all of the rights that would otherwise attach to their options or shares. This article explains how they work.
Under an ESS or ESOP, participants receive shares or options in the company that employs them. Sometimes, these shares or options will be subject to a ‘vesting period’.
The vesting period is the period between the date the options or shares are issued, and the date the participant is able to exercise all of the rights that attach to them.
Where there is a vesting period, participants will not receive the benefit of all of the rights that attach to their shares or options until after the vesting period has expired.
Where the ESOP involves options, participants are not permitted to exercise an option until after the vesting period has expired. If a participant leaves the company during the vesting period, any unvested option would lapse or be taken to have been forfeited.
Where the ESOP involves shares, similar principles would apply. If a participant were to leave the company during the vesting period, any unvested shares would typically be forfeited or sold at a discount (usually by way of buyback or sale to a third party for no consideration or at a discounted price).
In an effort to make employee share schemes more attractive, the Australian Government allows certain concessions to companies that are classified as 'start-ups'.
These concessions are designed to reduce the tax that participants would otherwise be liable to pay in connection with the interests they acquire under the scheme.
Broadly, a company will be classified as a start-up for the purposes of these rules where:
In addition to company eligibility requirements, to qualify for the concessions there are also eligibility requirements regarding the rules of the scheme and its participants.