How Can Share Schemes Attract and Retain Talent in Startups?

In Short

• Equity Incentives: Offering shares or options gives employees a direct stake in your startup’s success, helping to attract top talent.​
  

• Retention Through Ownership: Share schemes foster loyalty by aligning employee interests with company goals, encouraging long-term commitment.​L

• Cultural Benefits: Equity participation promotes a collaborative culture, motivating employees to contribute to the startup’s growth.​

Tips for Businesses

Implementing a share scheme can be a strategic move to attract and retain skilled employees. Ensure you clearly define the scheme’s structure, eligibility criteria, and vesting conditions. Seek legal and financial advice to navigate regulatory requirements and tax implications, ensuring the scheme aligns with your business objectives and complies with New Zealand laws.

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Table of Contents

• How Do Startups Attract Top Talent with Share Schemes?
• How Can I Retain Talent with Share Schemes?
• What Are the Challenges and Considerations?
• Key Takeaways

Attracting and retaining skilled employees is critical for a startup’s success. One powerful tool to address the difficulties faced by startups regarding talent acquisition and retention is share schemes. This article will take you through three key elements to understand the role of share schemes in attracting and retaining talent in New Zealand startups.

How Do Startups Attract Top Talent with Share Schemes?

1. Equity as Incentive

Attracting top talent is often challenging for startups, especially when competing against established companies with larger budgets that are able to offer attractive salaries. However, share schemes provide a compelling incentive for potential employees by offering a direct stake in the company’s success. This incentive motivates candidates to invest their skills and time into the startup, knowing that their efforts will contribute to the company’s growth and increase the value of their equity over time.

Share schemes have the potential for significant financial rewards and create a strong sense of employee ownership and commitment, commonly referred to as having “skin in the game”.

2. Alignment of Interests

One of the other main advantages of share schemes is that they align the interests of employees with those of the startup. When employees hold shares, they become stakeholders in the company’s success. This alignment of interests helps cultivate a culture of shared goals and accountability, which can lead the entire team to work together toward achieving common goals.

Startups recognise the importance of this alignment and know that a vested interest will lead to motivation and commitment amongst employees that benefit the business as a whole.

3. Wealth Creation

Share scheme participation allows employees to share in the potential wealth that comes with the success of a startup. This can be particularly attractive for candidates willing to take on more significant risks in exchange for the opportunity to gain substantial rewards.

How Can I Retain Talent with Share Schemes?

1. Foster Loyalty

In a highly competitive job market, retaining talent can be just as challenging as attracting it. Employee turnover can be difficult for all businesses but can be particularly disruptive to a startup’s growth. As such, share schemes play an important role in minimising this risk by fostering loyalty and long-term commitment to the business. 

Depending on how you structure your ESOP, typically, employees with equity in the company are more incentivised to stay with the organisation through the ups and downs. This long-term commitment is vital for the sustainable growth of a startup.

2. Building a Strong Company Culture

A strong company culture is a critical factor in employee satisfaction. Share schemes can contribute to shaping a positive working culture within a startup. This is because share schemes promote a sense of teamwork and support among employees, who all share in the vision of building a successful company.

3. Talent Development  

Share schemes also provide a method for developing and promoting talent from within. As employees become more invested in the company’s success, they will seek career growth and advancement opportunities. Startups can leverage this ambition by offering pathways to greater responsibilities and leadership roles. This approach benefits startups by reducing the need to recruit externally for management positions. In turn, this saves time and resources.  

What Are the Challenges and Considerations?

While share schemes are primarily a valuable tool for attracting and retaining talent, they also come with challenges and considerations. Startups need to address these factors to maximise the benefits of share schemes.

1. Equity Distribution

One challenge startups face is determining how to distribute equity fairly among employees. Deciding who gets how much can be a sensitive process. Startups need to develop transparent and fair guidelines for granting equity, taking into account factors such as the employee’s:

• position in the company;
• time served with the company; and 
• contribution to the company’s growth.

2. Equity Vesting

Equity granted through share schemes often comes with vesting conditions. This typically means that employees must remain with the company for a specified period before they can realise the full benefits of their allocations. 

However, time-based vesting and performance-based vesting requirements should be carefully structured to strike a balance between encouraging retention and providing employees with reasonable financial incentives. This can be a delicate process, making seeking legal advice highly recommended.

3. Administrative Difficulties

Managing share schemes can be administratively complex, given its legal and financial aspects. As a result, startups must invest in systems and processes to handle the documentation and legal requirements associated with equity grants. This is crucial to ensure compliance and transparency in the management of share schemes.

4. Regulatory Compliance

All companies offering ESOPs need to ensure compliance with New Zealand’s regulatory environment for securities offerings. This is a complex and highly regulated area, so seeking legal advice to navigate this landscape is critical.

Employee Share Schemes for New Zealand

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Key Takeaways

Attracting top talent is often challenging for startups. One powerful tool to address issues with talent acquisition and retention in a startup is the use of share schemes. Some key things to understand about employee share schemes include: 

• how they help attract talent;
• the relevance of them in retaining talent; and
• the challenges associated with employee share schemes.

If you need assistance understanding the purpose of employee share schemes in your New Zealand startup, you can contact our experienced startup lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.