Deep Dive into ESOP's (2/3)

In our last Deep Dive, we introduced Employee Share Option Plans (ESOP’s) to you. Now that you have a general idea about what they are and how they work, this email intends to answer some of the more common questions typically asked about ESOP's. So, before you ask…

Vested? Unvested? What's the difference?!

Vested options exist when the vesting criteria has been satisfied and the options can be exercised allowing for the purchase of shares. Prior to this, all options are considered to be unvested options.

Do options confer voting rights and dividends?

Nope! Rights to vote and receive dividends will only arise once the options have been exercised and shares have been purchased (i.e., the employee has gone through the exercise procedure).

Do I need to have the company valued in order to determine the exercise price for options?

In all likelihood, yes. There is no actual requirement for the exercise price to be market value, but in order for unlisted companies to get disclosure relief from ASIC, the exercise price cannot be less than the market value of ordinary shares at the date of grant, so you would need a valuation to support that. However, in some cases this could potentially be nil. We can point you in the direction of some company valuation experts if you required!

Can a parent company issue options to an employee of its subsidiary?

Most likely. Employees can even be offered options in a foreign parent company. The start-up tax concession (if applicable) will not be affected. However, you should take into consideration the difference in valuation between the parent (holding) company and the subsidiary.

What does the start-up tax concession mean?

It means the employee participating in an ESOP only has to pay tax upon acquiring financial benefit from the option (i.e., when the employee sells the shares).

Are there any disclosure requirements?

Offering options to employees can be considered to be an offer to the public and so  the Corporations Act requires that each offer be accompanied by a disclosure document. However, this can be quite difficult and costly to produce for the average startup, so the Corporations Act also provides relief if certain conditions are met. In the realm of a startup’s ESOP,  the relief is available to:

• offers made to senior managers; and
• small scale offerings — this means that, over a 12 month period, you cannot offer options to more than 20 employees over a 12 month period and the maximum capital the company can raise must not be more than $2 million.
  

Alternatively,  there are other disclosure relief options available to unlisted companies. However, most of these relief options are geared towards startups with a solid plan to go public.

Read more in Part 3

In the next part, we answer what the difference between vested and unvested options is and other frequently asked questions about ESOPs! Stay tuned or you can fast forward now and read all about it on our website.

Interested in chatting with us?

Contact us here. Or shoot us an email at hello@biztechlawyers.com.au. And of course you can always pick up the phone +61 2 9043 1376.