{"id":222461,"date":"2023-04-19T15:07:20","date_gmt":"2023-04-19T02:07:20","guid":{"rendered":"https:\/\/legalvision.co.nz\/?p=222461"},"modified":"2025-04-01T14:28:39","modified_gmt":"2025-04-01T01:28:39","slug":"legal-considerations-esop","status":"publish","type":"post","link":"https:\/\/legalvision.co.nz\/corporations\/legal-considerations-esop\/","title":{"rendered":"Points to Consider When Implementing an ESOP in NZ"},"content":{"rendered":"<p><span style=\"font-weight: 400\">Typically, in New Zealand, startups will set up their business as a company. One benefit of setting your business up as a company is that it is a structure that allows you to also put in place an employee share option plan. This article will describe employee share ownership plans (an ESOP) and what to consider when implementing one.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">What is an ESOP?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">An <\/span><a href=\"https:\/\/legalvision.co.nz\/startups\/issue-shares-options-incentivise-employees-startup\/\"><span style=\"font-weight: 400\">employee share option plan<\/span><\/a><span style=\"font-weight: 400\"> allows you to share ownership of the business with your key employees. ESOPs are used to incentivise employees and create long-term commitment to the company. Share options typically tie your employees to the company for an agreed period before they can be exercised into shares (and therefore constitute ownership). This entitles your employees to benefit from any uplift in the value of the company as long as they are enrolled.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">Why Do Businesses Utilise ESOPS?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">The main reason why businesses employ ESOPs is to reward and incentivise employees. If you wish to attract and retain top talent, offering equity is an effective way to do so. This gives employees a sense of participating in the business\u2019s future growth. In turn, this will incentivise their performance. As a result, ESOPs result in employees feeling more invested in the business.\u00a0<\/span><\/p>\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a href=\"tel:+64800005570\" class=\"not-prose\">0800 005 570<\/a> for urgent assistance.\n                <br>\n                Otherwise, complete this form, and we will contact you within one business day.\n                    <\/span>\n    <\/div>\n\n    \n\n<div class=\"not-prose flex justify-center text-left gform_input_bg_white    \">\n    <script>\nvar 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These include:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">how options are granted;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the vesting process;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">how options can be exercised or cancelled;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">how the company can buy back options or option shares under the ESOP;\u00a0<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the board\u2019s discretion to enforce or amend the rules; and<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">any protections for employees regarding the ESOP.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400\">Each employee will then be granted a specific offer letter that will typically outline the following:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">number of options or shares offered;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">exercise (strike) price;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">vesting specifics;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">when an employee can exercise their options;<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">specific rules that may apply to the employee; and<\/span><\/li>\n<li style=\"font-weight: 400\"><span style=\"font-weight: 400\">any conditions the exercise options may be subject to.\u00a0<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400\">Vesting Arrangements<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Most ESOPs contain certain vesting conditions. These conditions are often either time-based or performance-based (or both).\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">For time-based vesting, an employee must stay with the business for a certain period (usually three to four years) to receive full entitlement to their options. Options will vest gradually over that period. Once options are vested, your employee can typically convert them into shares.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">Performance-based vesting requires an employee to meet certain performance targets before the options vest. Sometimes these are tied to time-based vesting as well, or are standalone conditions.<\/span><\/p>\n<p><span style=\"font-weight: 400\">In some scenarios, an employee may not fulfil the vesting conditions of the ESOP. This means that a portion of their options (or all) remain \u201cunvested\u201d. What happens to unvested options depends on the rules of your ESOP as specified in the offer letter. Typically, unvested options lapse and the company cancels them. The employee receives nothing.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400\">Taxing of Options<\/span><\/h2>\n<p><span style=\"font-weight: 400\">Under current tax rules, there is typically no upfront tax liability when options are issued to an employee. Depending on the specific ESOP rules and the governing documents of the company, the employee is typically taxed when the option is exercised into shares. Tax law assesses the liability on the difference between the market value of the shares and the strike price.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">What Happens if An Employee Does not Exercise Their Options?<\/span><\/h2>\n<p><span style=\"font-weight: 400\">The terms of the ESOP entitle an employee to exercise their options at the point they vest. However sometimes the ESOP may provide that options can only be exercised on an exit event, like an IPO.<\/span><\/p>\n<p><span style=\"font-weight: 400\">Typically an employee will want to exercise their options ASAP (unless the strike price is higher than the market value of the shares). If they choose not to exercise, and there is a time period during which those options must be exercised, then typically the options will lapse and be lost to the employee. If there is no time period during which options need to be exercised, they can hold their vested options until an exit event occurs, provided the employee remains employed.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">Key Takeaways<\/span><\/h2>\n<p><span style=\"font-weight: 400\">An ESOPis a great way to reimburse your employees. An option is a right but not an obligation to buy shares in a business. A key benefit for businesses is that it is a great incentive to attract and retain top-talent employees. Giving employees an option to buy into your business will also motivate them to contribute to the ongoing success and growth of your business.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400\">If you need help implementing an ESOP, contact <\/span><span style=\"font-weight: 400\">our <\/span><a href=\"https:\/\/legalvision.co.nz\/business-sale-purchase-lawyers-lp\"><span style=\"font-weight: 400\">experienced business lawyers<\/span><\/a><span style=\"font-weight: 400\"> 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\u00a0 <a href=\"tel:+64800005570\" class=\"AVANSERnumber dynamic-number\">0800 005 570<\/a> or visit our <\/span><a href=\"https:\/\/legalvision.co.nz\/membership\/\"><span style=\"font-weight: 400\">membership page<\/span><\/a><span style=\"font-weight: 400\">.<\/span><\/p>\n<h2><span style=\"font-weight: 400\">Frequently Asked Questions<\/span><\/h2>\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1682004670899\"><strong class=\"schema-faq-question\">Do I have a vesting period on my ESOP?<\/strong> <p class=\"schema-faq-answer\">A vesting period is not compulsory. However, it is common to include one to ensure medium to long-term commitment from your employees before they exercise their options.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1682004684836\"><strong class=\"schema-faq-question\">Does an employee have to exercise their options?<\/strong> <p class=\"schema-faq-answer\">There is no legal requirement for employees to exercise their options, but if they do not exercise them before the expiry date (if any), they will lose them.<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"90c4126e1b\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/222461\" \/>            <input value=\"https:\/\/legalvision.co.nz\/corporations\/legal-considerations-esop\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"Points to Consider When Implementing an ESOP in NZ\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Typically, in New Zealand, startups will set up their business as a company. One benefit of setting your business up as a company is that it is a structure that allows you to also put in place an employee share option plan. This article will describe employee share ownership plans (an ESOP) and what to<a href=\"https:\/\/legalvision.co.nz\/corporations\/legal-considerations-esop\/\">Continue reading <span class=\"sr-only\">&#8220;Points to Consider When Implementing an ESOP in NZ&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13316,"featured_media":215607,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"217635,213930,1705,204157,203300,202699","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[14],"tags":[1370,1851,1864,1865],"class_list":["post-222461","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporations","tag-esop","tag-share-options","tag-esop-scheme","tag-vesting"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO 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