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In an early-stage startup, it is understandable that you cannot afford to pay competitive salaries to all your employees. Regardless of pay, you will need skilled and motivated employees to help your business thrive and grow. However, without the incentive of competitive salary, it can be challenging to attract and retain long-term employees. The question now stands as to what your options are for paying employees. This article will outline alternative options for retaining your startup employees.

Legal Obligations When Paying Employees

Even if your early-stage company cannot pay your employees competitive salaries, you are still obligated to comply with laws regarding employment wages. You must pay:

  • at least the minimum wage;
  • in cash unless you agree upon another method in writing;
  • as frequently as agreed upon in the employment contract; and
  • annual holiday leave to employees.

Employee Share Scheme

If you cannot offer competitive salaries, you can attract employees by offering them shares in your company. With an employee share scheme (ESS), you give equity to your employees. This can be beneficial for you as it inclines startup employees to be more productive and work to a higher quality. Knowing that they own a part of the startup makes them more likely to help contribute to the growth and success of the business and therefore increase the value of their shares. 

To ensure those employees stay in the business for some time before they can see total value for those shares, typically, an ESS provides that the shares issued are subject to time-based vesting. Additionally, sometimes you can also add performance-based vesting conditions.

The Inland Revenue Department (IRD) has some tax rules on an ESS due to it being employment income. The employee will need to pay tax on their shares, or you can deduct tax from their ESS benefit. IRD will tax income on the share scheme taxing date, which is when:

  • shares are transferred;
  • shares are cancelled; or
  • when an employee owns shares in the same way as any other shareholder.

Employee Share Option Plan (ESOP)

With an ESOP, you grant options to employees which they can later exercise into shares at a predetermined price. You may also want to provide financial assistance to employees to help them purchase the shares (or cover the tax liability arising as a result of exercising their options) when exercising the options.

The Financial Markets Conduct Act governs ESOP, and under it, the number of shares issued cannot exceed 10% of the shares issued in the same class. Furthermore, you may have to provide a disclosure statement for ESOP under the Act unless you:

  •  issue a warning statement; and
  • allow employees to access company information. 

In addition, you will need to comply with the Companies Act when issuing shares or provide financial assistance to employees to purchase shares. You can only provide financial aid to employees to buy shares if:

  • shareholders have consented in writing to assist;
  • board has resolved to assist;
  • assisting is in the best interests of the company; and,
  • assisting is fair and reasonable to the rest of the company.

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Offer a Flexible Work Environment

You can create an incentive for future and current employees through a flexible work environment. With a flexible work environment, employees can have remote work or have flexible hours that suit their needs. This allows employees to have an excellent work-life balance and spend time with their family and friends. As a result, employees may feel more inclined to work harder due to such a benefit. 

Such an environment can be a valuable perk to many employees; however, it needs to be well planned. For example, you should organise flexible hours and leave beforehand to hold employees accountable if they are not working to the expected standard. 

Hire Unpaid Interns

Interns can be a great option if you have certain lower-level jobs that need doing and can be done by people without any relevant expertise but seeking valuable work experience.

However, if you give interns tedious jobs that they have no interest in, they could quit, which would be disastrous. Instead, you should meet with the interns regularly to understand how they handle their work and if they feel their experience is satisfactory. It is also essential to reward them for their hard work to ensure they feel seen and acknowledged.

Hire the Right Fit

Finally, you should look for employees who can enhance your company culture and have the relevant soft skills. With employees who make your company a better place to work at, your startup can look more attractive to the best candidates regardless of whether you can offer competitive pay. Soft skills may include:

  • emotional intelligence;
  • communication skills;
  • problem-solving;
  • ability to be valuable team members;
  • adaptability; and
  • conflict resolution.

Employees should be self-motivated, innovative, and passionate about their work. Such employees generally will not prioritise money but are looking for a role that fits their interests. However, it is essential that once you have hired such employees, you meet their needs, and they are given a fulfilling role for retainment purposes. 

Key Takeaways

If you cannot pay competitive salaries to your startup employees, there are other ways to attract and retain them. You can pay employees with equity through an ESS or an ESOP, although you must comply with the Companies Act and the Financial Markets Conduct Act. You also can offer a flexible work environment such as flexible working hours or allowing employees to work from home. Finally, unpaid interns are a great way to get tasks done without paying competitive salaries or hiring employees who are there for the role and not for the money. 

If you need help with understanding your options for paying startup employees, our experienced startup 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 0800 005 570 or visit our membership page.

Frequently Asked Questions

How can I pay employees through equity?

You can pay employees with equity through an ESS or an ESOP. You can issue or transfer shares or options to employees through these schemes instead of paying them a competitive salary. This can enable you to secure excellent employees at a lower than market salary.

What is the difference between an ESS and an ESOP?

An employee is issued shares under an ESS and options under an ESOP. Both arrangements typically require an employee to stay in the business for a certain period and meet specific performance targets before they can gain the full benefit of those shares or options. Under an ESS, employees are issued shares upfront, which means they become a shareholder immediately. Under an ESOP, employees only become shareholders once their options vest and have been exercised. Therefore, an ESOP allows a company to keep its cap table manageable.

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