The Ts&Cs of share schemes
WHAT TO DO: ENTREPRENEURS MUST DECIDE ON THE TERMS OF EXIT FOR THEIR EMPLOYEES.
Rewarding your staff for their loyalty is both prudent and appreciative.
Over the past weeks I’ve been discussing employee share schemes (ESSs) and how you as a business owner can benefit from them in regard to incentivising your employees and improving your broad-based BEE score card, and how your employees can benefit through greater responsibility and earning potential.
I also touched on the legal and administrative side, including tax implications and compliance issues stipulated by the Companies Act.
The final piece of the puzzle to setting up your ESS would be deciding on the stipulations to impose that would dictate terms and conditions (Ts&Cs) of participation.
These are rules you are free to dictate as the owner of the company who has on his/ her volition chosen an ESS. But remember, these rules must fall within the parameters of the law of which it would be prudent to consult your lawyer.
The first and most common Ts&Cs is usually to stipulate which employees qualify based on what criteria. The obvious starting point would be term of service.
Most entrepreneurs have employees they started with from day one and usually these are the people you want to reward and recognise for their service and loyalty.
Entrepreneurs are familiar with the pain of starting a company but sometimes forget that their employees go through similar uncertainties when they choose to join a start-up. Rewarding them for their loyalty is both prudent and appreciative.
In that same context, there are other employees who joined your organisation after your success but became integral to your continued success. Decide on how many years they must serve before being eligible to join the scheme.
Thereafter you must stipulate Ts&Cs that allow an employee to continue participating in the scheme. The most obvious condition would be what happens if they leave through resignation or termination of contract.
It is rare to see an employee work for another company while participating in their previous employer’s share scheme. Therefore, what are your terms of exit? Do you buy back those shares or do you give a different employee the opportunity to buy into the share scheme?
And finally cashing out; some employees might see an opportunity to make a hefty amount by selling their shares.
Do you have an exit timeframe attached to the scheme? In most cases companies stipulate a lock-in period of five years or more.
This allows you to benefit from the additional impetus from employees’ renewed desire and ambition into the company but, more importantly, it allows shares to accrue in value and provide a meaningful return to the ESS.