Employee Share Ownership Plans (ESOP) as a Funding Option?
Many people are aware we use Employee Share Schemes (ESS) as a Business Succession and Exit Planning tool to help retain key people, to improve SME performance, to build the team culture and engagement. They are also well known as a potential exit strategy where the founders sell the business over time to the employees.
Employee shares in private companies are also a potential funding option. The rules were improved in 2015 to make employee share plans more attractive and easier to implement. As a by-product, the plans can be used to ease cash expenses and can also be used to raise capital by having employees buy-in.
The traditional tax-free plans have always allowed employees to obtain up to $1,000 in “free” shares per annum. Most listed companies utilise this model and there is no reason why smaller privately owned companies cannot use the ESS rules in the same way.
The new rules also incorporated a salary sacrifice model whereby employees can salary sacrifice up to $5,000 per year to contribute to an ESOP. This can also reduce the cashflow cost to the employer whilst providing employees with access to equity in the company they work for.
Employee Remuneration Trusts
In the same way, the Employee Remuneration trust style plans – like our Peak Performance Trust allows employees to contribute financially to buy the shares. This is a mechanism to provide additional capital to the company. This can also be aided thru the use of a vendor (company or founder) loan to allow the employee to buy more shares. This capital can be used to fund growth (issue of new shares and capital retained by the company) or can be used as a succession tool to buy-out the owners (sale of shares and capital provided to the existing shareholders). Both methods work to obtain capital and can be an excellent succession funding option.
Obviously, the employee share plan must be designed to meet the rules, but this is not as difficult as it used to be under the old rules. Employee shares in a private company can be used as a funding mechanism, in various formats, with substantial other benefits in terms of performance and engagement.