As a startup, you may utilise employee share schemes to attract high-quality talent. Employee share schemes allow employees – or give them the option – to hold equity in the company. This attracts employees as it means they may gain further if the company succeeds. One way that businesses establish employee share schemes is through an employee share option plan. This article will explain what an employee share option pool is and what happens to unvested options in the case of an exit event in New Zealand.
What is an Employee Share Option Plan?
An employee share option plan is a program that allows employees to take equity in a business. The program gives employees options to exercise into shares in the future according to a pre-determined set of rules, including vesting (or “earning”). A share option is a right to buy shares at a specific price. This price is the strike price, and most options will have an expiry date.
What are Unvested Options?
Vesting provisions are often applied to share options to ensure an employee meets certain criteria before exercising options into shares. These criteria may be time-based, for example, staying with the company for three years. Alternatively, they may be performance-based, such as meeting pre-agreed KPIs within a specific period.
There are many reasons an employee is waiting to exercise their share option. For example, the business’ share price may be lower than the strike price, so exercising the option would not be profitable. Additionally, the employee may need more cash to exercise their options. However, many businesses choose to lend funds to their employees to enable them to exercise their options).
Continue reading this article below the formWhat is an Exit Event?
An exit event refers to the change in control of your startup. An exit event can comprise varying different situations.
Sale
One of the most common exit events is the sale of your business. This is when your business is sold to an individual or entity. For a lot of startup of founders, this is the end goal.
Merger
Another type of exit event is a merger. Mergers are when your company merges its operations with another to become a larger entity. It may allow you to tap into new markets or provide growth opportunities for your business.
Management Buyout
Like a sale, a management buyout is when your management buys the founders out rather than an external entity buying the business. This is common when the founders want to exit the business.
Understand how an Employee Share Scheme will help your NZ startup attract and retain great talent.
Unvested Options During an Exit Event
Often, unvested options will be accelerated to enable employees to exercise those options before the exit event.
Migration
In some cases, the options may migrate to the new company. This is likely in cases where a company is sold, but the business’ operations and employees remain the same. Accordingly, the employees will continue to hold options in the new entity if migration occurs.
Key Takeaways
If you have a business in New Zealand, consider creating an employee share scheme such as an employee share option plan. Share options allow employees to buy shares in your business for a certain price. This gives your employees a further incentive as the value of their options will increase if your business is more successful. It also helps attract high-quality talent.
If you need help with employee share schemes, our experienced commercial 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
Unvested options are options that still need to be vested. You cannot exercise unvested options into shares.
Vested options are options that have vested (or been “earned”) but have not yet been exercised into shares by the employee.
We appreciate your feedback – your submission has been successfully received.
