Last week we talked about reorganizations- and how to get your team through a restructuring of your business. As we believe that your team is one of the most critical determinants of your company success, we have decided to talk more about it today! Many business founders decide to give their employees some ownership in their company, for a variety of reasons. If managed properly, Employee Ownership Plans benefit both the employee and the company and create a genuine win-win situation.

But, first we’ll take a step back. Today, we will explain Employee Stock Plans and the benefits of getting involved in a program like this as a business owner.

An Employee Stock Purchase Plan- or ESPP, is a program where participating employees can buy company shares at a discounted price within a certain period. Between the offering and purchase date, employees can decide whether they want to exercise the option or not. Employees can contribute through payroll deductions, which the company uses to buy shares on behalf of the participating employees. Basically, it entails that employees get ownership of the company they are working for. The discount employees get can be as high as 15% compared to the market price.

Employee Stock Plans are most common in the United States, and used by both public and private companies. According to the NCEO, the National Center for Employee Ownership, today there are 7,000 ESPPs covering about 13.5 MLN US employees. Besides ESSP, there is also ESOP- Employee Stock Ownership Plan, that works a bit different. In an ESOP, the company sets up a trust fund, in which it contributes new shares or cash to buy existing stock. These funds get allocated to employee accounts. If employees leave the company, they receive their stock.

There are two types of ESPPs- qualified and non-qualified. A plan is considered as qualified if stock is held at least one year after the purchase date, and at least two years after the offer date. Non-qualified plans don’t have such requirements, but do not offer additional  tax advantages besides the opportunity for employees to buy company stock at a discount, while qualified plans do.

The Benefits of Employee Stock Plans

The reason a company gets involved with ESPP or ESOP programs is mainly due to tax benefits, or to buying out a departing owner. Moreover, companies use these programs to attract, retain and compensate employees.

Stock plans are considered to be an effective employee tool to retain and compensate team members. They help employees think more like an owner, which aligns their interests with those of shareholders. They are more triggered to do what’s best for the company, as they benefit from a good company performance too.

Another benefit of an ESPP is that it is quite easy and straight forward to implement. Furthermore, it encourages investing and saving, and especially the latter is important, as it can be difficult as a company to motivate employees setting up a plan. Moreover, employees can decide each period whether they want to participate in the plan or not, and the amount or percentage they want to contribute.

A substantial drawback of such a program is that is quite expensive for smaller businesses to realize. Moreover, by giving away ownership, the stock of existing shareholders get diluted- your stake in the company will relatively decrease then.

Employee Ownership for Small Businesses

For small companies that want to sell shares to employees, the legal costs and complexities might prevent them from an Employee Stock Program. You can still benefit from tax advantages, but the question is whether this advantage outweigh the costs. In case you just want to share some ownership with your employees, stock options or restricted options are possibilities.

The NCEO set up a useful guide about Employee Ownership Plans for small businesses, click here to read more!

Thanks for reading. If you need some help how to use the Equidam technology in your Employee Stock program, don’t hesitate to contact us via email or tweet us!