Employee Stock Options (Noob Post)

Discussion in 'Share Investing Strategies, Theories & Education' started by albanga, 6th Jun, 2021.

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  1. albanga

    albanga Well-Known Member

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    Hi All,

    Around 12 months ago I joined a new company (software) and as part of my contract it noted an ESO scheme available to employees after 3 years.

    In our recent company meeting the director advised he is going to now make this available to all employees effective this year.

    I am a big believer in the company and its future and would love to get involved but no nothing about ESO. Obviously I have done some initial Googling but always prefer to speak to my PC peers.

    So just wanted to open this up for a broad discussion to get peoples feedback:
    1 - Are these usually a good/bad idea?
    2 - What should I be looking out for in the options scheme?
    3 - What is the best way to structure purchasing ESO? (I assume a purchase would be deductible).
    4 - And just generally share your knowledge.

    I am not going to lie I am having an epiphany of me purchasing stock and the company sells for 500million hahaha
     
  2. The Y-man

    The Y-man Moderator Staff Member

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    We've bought shares through employee share schemes in the past. I think it is a great idea for the company as both a motivator (so that the employees have vested interest in the business). They are usually at a discount to "retail", brokerage free, and the option structure is usually such that if the price is not agreeable, you simply let it lapse.

    The only major gripe I have had with previous experience is that the number of shares you can get hold of (unless you are in the CxO suite) is very limited.

    The Y-man
     
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  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    ESS interests vary substantially and can be easier to appraise value for a listed entity. There are basically two schemes - Broad "all employee" schemes and "executive" level with more performance orientated issues and timing events. All employee schemes tend to be a limited tax free benefit capped at $1K. Except if you are a high income earner.

    Shares and options vary and options have a tax trap. When options are exercised a new CGT interest is created (shares) and the 12month CGT clock is started.

    SOME can be structured and other cannot (initially) and are only available to the employee. All employee schemes arent suitable for transfer of ownership. For many the vesting date for ESS shares is a tax trigger and may be a date to reset ownership if there is a CGT potential. On that date many clients will transfer shares to a trust since the CGT event has already occurred on that vesting date. Any further growth may benefit others eg wife.
     
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  4. albanga

    albanga Well-Known Member

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    WOW thanks for that! Makes a lot of sense.
    I have not seen the offer yet but have been wondering how difficult it is going to be to gauge the option price given it’s not a listed company.
     
  5. The Y-man

    The Y-man Moderator Staff Member

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    Sorry I missed this bit!!!

    Ok - this could be great or a fizzer.

    Are they looking at an IPO in the near future?
    The issue here is being able to sell out (liquidity)

    The Y-man
     
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  6. Harris

    Harris Well-Known Member

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    Most software companies offer ESOPs, especially if they have IPO plans in the near- medium term. Markets want to see key employees with skin in the game.

    I have been part of 4 different ESOPs whilst an employee and created 3 for my various ventures. Mixed bag re the outcome but quite valuable from mgt/ shareholders' point of view as it keeps good talent around for much longer than they would without those options.

    I did well out of 1 (of the 4 that I was part of as an employee) however even with ESOPs, besides the optics of having one (for the markets/ shareholders to see) for my own ventures, there was no value we could see for the employee-stickability.

    We never asked for the employees to pay for the Options to exercise until such time they were ready to monetise with a liquidity event and this is critical. You should only be asked to exercise those when there is a liquidity event however retain the right to subscribe for a parcel (your entitlement) throughout your employment.

    Generally it's a 5%-10% of the total shareholding and as someone else pointed the Board and the exec Mgt will help themselves with most of it so unless there is a $B in there at the liquidity event, they might not be as 'valuable' as the CEO's warm and fuzzy email might read whilst announcing these.

    If you are critical to the company, you might have an option to negotiate 'up' and especially if the company has really solid IP and also happens to be very cf-generative!

    Good luck
     
  7. Harris

    Harris Well-Known Member

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    +1 - this is great advice
     
  8. albanga

    albanga Well-Known Member

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    What a fantastic and insightful post, thanks so much for sharing!

    I am very bullish on the company, I was poached to them after project managing the implementation of there product into my previous employer.

    I know they have a large investment already from a major exchange listed company and the applications purpose is required in majority of businesses.

    Way too early to tell an end game but just so I know how it works as a hypothetical.
    If I were given the opportunity to buy say 5,000 shares.

    Am I reading it correctly I could only sell these options in an event such as me leaving or the company being listed or sold?
     
  9. Harris

    Harris Well-Known Member

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    It depends on the Ts & Cs of the ESOP agr. You could sell if the Options are already vested but there are rules in most ESOPs against selling unrealised options (yet to vest) or that the Company will have the first right to buy back your Options if they are already paid-for and I am 99% sure, you won't get a premium for those as per the agr.

    It also depends on if you are being offered those Options at a heavily-discounted price (90% or more) or they come with a nominal discount (say 50% below market cap).

    I bought the Options once from a colleague for an unlisted public company mid 2000s by paying her a premium on her exercise price but I have since seen most ESOPs with clauses that exclude trading of Options within the employees without the approval from the Exec Mgt.

    You should still buy them if you are getting a massive discount to the true current value however if you can, you should negotiate vesting those say each quarter for a few years so you gradually build up your Options packet.
     
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  10. albanga

    albanga Well-Known Member

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    Thanks Again!
    And just another question regarding “buy them heavily discounted”.... if they are not publicly listed how will I be able to tell this??

    I assume the company has to be audited to confirm a market value?
     
  11. Harris

    Harris Well-Known Member

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    You can ask the issuer (Company) of where the current market cap is (doesn't require audited accounts) and the total number of shares on issue and work it out yourself. Also ask the proportion of shares being part of ESOP Vs the total shareholding (so you work out what proportion is ESOP made up of) and the exercise price. They should give you an agreement which would have the details sans the current market cap of the company.
     
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