Thursday, February 28, 2013

Employee Share Plan

Today we launch our employee share plan at Shoes of Prey. We've hired a fantastic team and we want everyone to be part of the growth and success of the company. Launching the plan has been a while in the making. As part of our Series A fundraising round we and our investors agreed to allocate 8% of the total company equity to our employee share plan. After closing the Series A round we had to then work out the best way to set up the plan as this isn't a simple thing to do in Australia. About 5 years ago the government tightened up the rules around taxing employee share plans to limit some of the loopholes investment banks were using. Unfortunately these changes made employee share plans harder for everyone, including tech startups.

The way our plan is structured is as follows:

  • Employees purchase shares from the company at the Series A valuation price.
  • The company provides employees with a limited recourse, interest free loan to fund the purchase of the shares.
  • The shares are subject to forfeiture and cancellation prior to their vesting date. 25% of shares vest on each of the first 4 anniversaries of the employee's start date.

The benefit of this structure is that employees don't pay tax up front on the allocation of shares because they're purchasing the shares at their full value. Then, once the shares are held for 12 months, if Shoes of Prey has a successful exit event, the capital gains tax discount will apply.

This structure took us a while to work out, as did finding a good accountant to set up the documents for us. We used David Kenney (dkenney@hallchadwick.com.au) from Hall Chadwick who has set up a number of these plans. If you're looking to set one up for your own startup, depending on exactly what you need David can do the documents up for sub $10,000.

Here are the slides from our presentation to the team on the employee share plan, they contain some further details about the plan those looking to set one up might be interested in.

At the Prime Ministers' Forum on the Digital Economy I raised the issue that the legislation around employee share plans needed changing for startups. The legislation we have is still far from ideal, and setting up an employee share plan is more complex than it needs to be. However once you find someone to do it for you, it's not that difficult, and paying under $10,000 to set one up is within the budget of startups who have received funding and are looking to set one up. So I've changed my tune, it's probably not worth the effort to change the legislation here just for startups, I'd rather see the government focus on more critical areas like education.

7 comments:

  1. Hi Michael,

    It's great that you've set up a share purchase plan for your employees, but having to give your employees a loan to do it, is to use the software vernacular, a "hack." Stock options would still be more straightforward/efficient, but that of course requires legislative changes.

    Alan

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    1. Hi Alan,

      I like the hack analogy. :) t's not ideal that we have to do this hack, but given the cost of doing it was only $5k for us it wasn't a big deal. The loan is only in documentation form, no money has to actually be transferred and there's no other admin because the company loans the employee the money then the employee pays it straight back to the company to purchase the shares = easy.

      The government would spend a small fortune setting up committees to review and change the legislation and I don't think it's worth it for a problem with a $5k-$10k fix. I think that time and money would be better spent on larger issues like education given we can easily hack around what's already there.

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    2. If it works and it stops merchant banks rorting the system, it has a fair bit going for it.

      Delete
  2. Great insight Michael, thank you for sharing your wisdom and experience. You and your team deserve every success.

    All the best,
    Luke

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  3. Really useful.

    best regards, rolf

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  4. This is pretty interesting. I'd be really interested to understand how you avoid needing to pay FBT since you are providing the loan interest free.

    The aspect that would concern me as an employee under such a scheme is what happens in the case where control of the business changes hands, especially in a down round? It seems that there is a risk to an employee that a future board could call in those loans. In a down round if the debt is instead forgiven doesn't that imply that a debt waiver fringe benefit is provided to the employee, and the company is up for a bunch of FBT?

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  5. This sounds great that you include all your employees in your business growth and success, many regards, its amazing and inspires reverence.

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