As a startup owner with limited capital, finding ways to retain staff with competitive salaries can be difficult. Nevertheless, Phantom Share Schemes are rising in popularity among New Zealand startups as a way to attract and retain employees. Put simply, Phantom Share Schemes are non-equity-based incentive plans. This article will take you through critical things about Phantom Share Schemes for your New Zealand startup.
What Are Phantom Share Schemes?
A Phantom Share Scheme is an employee share scheme that provides monetary rewards to employees. These rewards are tied to the company’s performance and valuation. However, Phantom Share Schemes differ from traditional equity programs because employees do not hold tangible shares. Instead, participants in the scheme receive payouts based on the growth in the company’s valuation over a predetermined period.
In this sense, a Phantom Share Scheme is a beneficial program for both employees and businesses since:
- employees are more engaged in a company’s growth; but
- the startup founders do not have to alter the ownership structure.
In other words, a Phantom Share Scheme allows founders to preserve their equity in the company while motivating employees and fostering their engagement.
Understand how an Employee Share Scheme will help your NZ startup attract and retain great talent.
What Are the Benefits of Phantom Share Schemes?
Various benefits to Phantom Share Schemes make it worth considering for your New Zealand startup. Some of these benefits are outlined below.
1. Strategic Alignment
Phantom Share Schemes are beneficial because they align the company’s and the employee’s interests. This alignment helps to create a sense of dedication among employees, making them more proactive participants in your company.
2. Flexibility
One of the significant benefits of Phantom Share Schemes is how adaptable they are. Startup owners can tailor Phantom Share Schemes to suit the company’s and its employees’ needs. This is particularly beneficial for startups that are still in the early stages of developing the company’s identity.
3. Enhanced Performance
The prospect of financial reward helps increase employee performance. Employees whose performance is directly tied to company success will likely surpass expectations and have enhanced productivity.
4. Increased Employee Retention
By providing employees with a stake in the company’s growth, these schemes contribute to a more passionate and dedicated workforce. This increased engagement can lead to increased employee retention.
5. Competitive Recruitment Edge
By embracing non-traditional compensation strategies such as Phantom Share Schemes, startups can have a competitive edge. This is because such offerings can help attract talent-seeking progressive employers that align with their values.
Continue reading this article below the formHow Can Startup Founders Implement Phantom Share Schemes?
While Phantom Share Schemes are highly beneficial for startups, there are several steps to implementing such a scheme.
1. Preparing the Groundwork
Implementing a Phantom Share Scheme begins with developing a plan. This requires you to define the scheme’s:
- eligibility criteria;
- payout triggers, such as performance metrics that must be met; and
- vesting period.
Defining how the Scheme will operate provides the foundation for the entire scheme’s success, making it a critical part of the process.
2. Navigating the Law
Phantom Share Schemes require intense legal and tax considerations. As such, it is recommended that you seek expert advice from legal and financial professionals. This will help ensure that:
- all scheme participants are protected; and
- your business complies with current laws.
3. Open Communication
Open communication plays a pivotal role in ensuring that employees understand the inner workings of the Scheme. This includes:
- risks;
- potential rewards; and
- alignment with the company’s overarching goals.
Further, communication fosters trust between the employees and your startup, contributing to a healthy working relationship.
4. Develop a Valuation Framework
You must develop a robust framework for valuing phantom shares. This will minimise confusion and potential disputes with your employees and is essential for maintaining clarity throughout the scheme’s operation.
Tax and Legal Aspects of Phantom Share Schemes
Phantom Share Schemes introduce tax implications for both the company and its participants. By carefully structuring the scheme, you can optimise the tax benefits for participants while ensuring compliance.
Further, Phantom Share Schemes must be aligned with New Zealand’s regulatory landscape. This includes relevant:
- employment laws; and
- securities regulations.
Legal compliance ensures the scheme’s legality and contributes to its credibility amongst employees.
Key Takeaways
As New Zealand’s economy and employment landscape evolves, innovative compensation packages like Phantom Share Schemes will become more critical in the workplace. Some critical components of Phantom Share Schemes for you to understand include:
- what a Phantom Share Scheme is;
- what its benefits are;
- how you can implement the Scheme; and
- the associated tax and legal implications.
If you need assistance understanding how your business can benefit from and establish a Phantom Share Scheme, 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
We appreciate your feedback – your submission has been successfully received.
