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 (email@example.com) 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.