Employee share scheme

What to consider when implementing a employee loan-to-purchase scheme

Keegan Vivian-Greer
Keegan Vivian-Greer

3m read

Employee share schemes (ESOPs) are an efficient way to attract, retain, and incentivise key talent in your business by allowing employees to become partial owners in the company. When considering implementing one, there are several options, one of which is a loan-to-purchase employee share scheme. 

In this article, we examine the difference between a loan-to-purchase scheme and other share plans, considerations to be aware of, and how to establish such an employee ownership scheme in your company. 

What is a loan-to-purchase share scheme? 

A loan-to-purchase share scheme is when a company loans employees money (usually on a low or interest-free loan) to purchase shares upfront in the business at market value. The loan is either provided by the company or a financial institution that has partnered with the company. Participants in the scheme are contractually required to repay the loan via their salary and/or any company dividends they may earn. A loan-funded scheme can also be structured so that if the company awards cash bonuses to scheme participants, they also contribute towards loan repayment. 

A key benefit of this employee share scheme option is that it allows employees to become instant beneficial owners in the company rather than working towards earning shares via share options or sweat equity. This scheme also encourages an engaged team of employees who have ‘bought’ into the company’s future. 

However, it’s important to be aware of tax implications with this share scheme option. Employees may be required to pay tax on the value of the shares they receive (minus the price they paid).

How does a loan-to-purchase share scheme differ from other employee share schemes? 

A loan-to-purchase scheme often works best in more established companies that are paying dividends, rather in early-stage start ups. It allows shares in the company to be immediately ‘sold’ to employees via a loan scheme, rather than the employee having to work towards buying the shares. 

Another common employee share scheme option is Share Options (often referred to as ESOP). This scheme entails a contract between the company and employee where the company agrees to issue new shares to the employee at a specific price at a later date. Share options are often selected by companies where the future of the company is still hard to predict and the intended benefit to the employee is a potential gain in the value of the shares in future.

Phantom or Bonus Share Schemes is another employee share scheme option available to companies. A phantom share scheme provides employees with a contractual right to a cash bonus when certain KPIs or events are achieved. Phantom share schemes are often favoured by companies with a strong profit share focus, while maintaining control of the company’s equity. The scheme includes the benefits of formal share ownership, without requiring physical shares to be transferred to the employee. 

What to consider when implementing a loan-to-purchase share scheme

If your company is considering implementing a loan-to-purchase share scheme, then there are several things you need to consider.

1. What employees would you like to offer this opportunity to?

Take the time to consider what type of key talent you would like to attract to your business and retain with an employee share scheme, along with the employees already at your company. Be clear about the benefits for both the participants and the company. 

2. What percentage of total company shares will the scheme take up?

Work with your board, financial advisors, and lawyer to determine what percentage of the company you will offer as part of the employee share scheme.

3. How many shares will you allocate to each participant?

Work with financial advisors and lawyers to determine how many shares will be allocated to each participant in the scheme. Make sure this is clearly outlined in any material provided to participants. 

4. How will employees purchase shares?

If you’ve selected a loan-to-purchase employee share scheme approach, participants can purchase shares in the company via a loan from the company. Ensure that employees know all the finer details of this agreement, including how this loan will be repaid to the company and any interest that accrues.

How to establish a loan-to-purchase share scheme

Before establishing a loan-to-purchase share scheme, we recommend companies check off the following with internal and external stakeholders and advisors: 

  1. Raise the matter with your Board and/ or existing shareholders to receive their approval and ensure they are aware of the share scheme details
  2. Conduct a pulse survey of the employees you are considering for the loan-to-purchase share scheme to ascertain what the level of interest is
  3. Work with a lawyer on the details of the scheme. If you need support in this area, we work with a selection of curated law partners throughout New Zealand and can point you in the right direction
  4. Develop a clear communication plan for how the loan-to-purchase share scheme will be announced internally to employees and externally
  5. Develop a plan for how shares will be issued and administered to participants, along with any FAQs and details they need to be aware of, such as how shares are publicly recorded.  

Where to from here? 

Are you interested in implementing a loan-to-purchase share scheme in your business? Orchestra is an all-in-one equity management platform that offers a wide range of employee share scheme solutions, including Employee Share Purchase Loans. 

Our experienced team has worked with New Zealand and Australian businesses of all sizes on their employee share schemes, and we can help you find a solution that works best for your company. 

Are you interested in learning more? Register for a FREE demo and learn how Orchestra’s employee share scheme features can transform your business.

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