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How to Offer an ESOP to an Overseas Employee or Contractor

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An Employee Share Option Plan (ESOP) provides an excellent avenue for a business to attract and retain talented individuals, regardless of their geographical location. Overseas employees and contractors gain the ability to buy shares at a future date as ESOPs give the right to purchase options in your company.  This article will explore how they work and the steps to offer ESOPs to overseas employees and contractors.  

What is an ESOP and Can It Be Offered Overseas?

An ESOP entails allocating share options, which can be awarded to employees or pivotal individuals in the future, representing company shares. By exercising these allocated options, the recipients of the ESOPs can purchase a stake in the company at a pre-determined, often attractive price. 

Your employee does not need to be a New Zealand resident to hold shares or options in a New Zealand-based company. In most cases, unless the company operates in a sector related to national security, there are usually no constraints preventing international employees from holding shares or options in a New Zealand company.

Why Should I Offer an ESOP?

Companies choose to implement an ESOP for several reasons, which include: 

  • assisting in talent attraction through expanded equity options accessible to overseas employees and contractors;
  • helping with talent retention, as it acts as an incentive stock option, particularly with ESOPs featuring vesting periods;
  • fostering alignment among the company, investors and the team;
  • acknowledging value creation by granting employees a share in that value; and 
  • helping contribute to your company’s capital planning.
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How to Implement an ESOP?

For optimal utilisation of an ESOP, it is recommended to extend ESOPs across the board to avoid disengagement among employees and acknowledge the efforts of early team members who helped you build your vision early on, especially if you are a startup. This, therefore, establishes a culture of high performance. Further, establishing ESOP tiers may be beneficial. For example, establishing tiers from executives to junior hires streamlines administration while ensuring transparency and fairness. 

This article will now explore some useful steps when implementing an ESOP.

1. Obtain Approval from Key Stakeholders

Initiating an ESOP requires seeking approval from key stakeholders within your company. Depending on your company’s constitution and shareholders’ agreement, you may need approval from your board, shareholders, or a combination of both. 

2. Draft Your Plan Rules

At the core of an ESOP lies the Plan Rules. These rules outline your company’s ESOP framework, which specifies employee eligibility criteria, vesting conditions and protocols for employee departure from your company. In this plan, you can include a buffer that accommodates future changes in hiring needs or unforeseen circumstances. 

3. Extend Your ESOP Offers to Overseas Employees and Contractors

Overseas employees can participate in your company’s ESOP scheme only in receipt of an individual offer. The best way to do so is through an ESOP offer letter which clearly outlines the following: 

  • The number of options extended to the employee or contractor; 
  • The exercise price for these options; and 
  • Vesting conditions that apply to their options.

4. Record Issued Options Under Your Company’s Options Register

Maintaining a register of issued options under your company’s ESOP is standard practice and is commonly recommended as it tracks and documents the allocation of options to employees or contractors. 

By carefully following and understanding these steps, you can effectively implement an ESOP tailored to your New Zealand-based company, ensuring compliance and clarity for all parties involved. 

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What Are Vesting Provisions in ESOPs?

Vesting has been previously mentioned above and is simply the process where employees gain the full rights to their allocated options, allowing them to convert these options into company shares.

ESOPs usually include vesting provisions designed to encourage long-term commitment, ensuring employees are rewarded for their ongoing contributions to the company. The specifics of these provisions can differ based on the individual ESOP and company needs.  

Importance of Compliance

When you are considering implementing an ESOP in New Zealand, you should adhere to: 

  • the Financial Markets Conduct Act; and
  • the Companies Act. 

The reason for strict compliance with both Acts is that issuing options falls under the category of issuing a security, subject to regulation. New Zealand rigorously governs securities law, so seeking legal advice to understand these legal obligations is advisable.

Tax Considerations for Overseas Employees

If your overseas employee is not a New Zealand tax resident, they might still face tax obligations in New Zealand for any ESOP interests your company grants them. Tax implications for overseas employees depend on vested options and tax treaties between countries. It is advisable to seek professional tax guidance in New Zealand and their home country.

Key Takeaways 

ESOPs are helpful for employers wanting to motivate and retain talent within their businesses and startups. In New Zealand, no restrictions prevent you from granting ESOP options to your overseas employees. However, it is wise to seek independent tax advice, both in New Zealand and in their country of residence, to ensure compliance. 

If you need help preparing for an ESOP to be offered to your overseas employees and contractors, LegalVision’s experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on today on 0800 005 570 or visit our membership page.

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