How loan-to-purchase employee share schemes are different
In this article, we look at loan-to-purchase share schemes and how they’re different to share option plans and phantom share schemes.
Employee share schemes are an efficient way to attract, retain, and incentivise key talent in your business. When considering implementing one, there are several options, one of which is a loan-to-purchase employee share scheme.
What’s a loan-to-purchase employee share scheme?
A loan-to-purchase share scheme is when a company loans employees money (usually on a low or interest-free loan) to purchase shares upfront in the business at market value.
The loan
The loan is either provided by the company or a financial institution that has partnered with the company.
Participants in the scheme are contractually required to repay the loan via their salary and/or any company dividends they may earn.
A loan-funded scheme can also be structured so that if the company awards cash bonuses to scheme participants, they also contribute towards loan repayment.
Benefits for employees
A key benefit of a loan-to-purchase scheme is that it allows employees to become instant beneficial owners in the company rather than working towards earning shares via share options or sweat equity. This scheme also encourages an engaged team of employees who have ‘bought’ into the company’s future.
Tax
It’s important to be aware of the tax implications with this share scheme option. Employees may be required to pay tax on the value of the shares they receive (minus the price they paid).
How’s a loan-to-purchase share scheme different to other schemes?
A loan-to-purchase scheme often works best in more established companies that are paying dividends, rather than in early-stage start ups.
It allows shares in the company to be immediately ‘sold’ to employees via a loan scheme, rather than the employee having to work towards buying the shares.
Share option plans
Another common employee share scheme option is a share option plan. This scheme entails a contract between the company and employee where the company agrees to issue new shares to the employee at a specific price at a later date. Share options are often selected by companies where the future of the company is still hard to predict and the intended benefit to the employee is a potential gain in the value of the shares in future.
Phantom share schemes
Phantom (or bonus share) schemes are another employee share scheme option available to companies.
A phantom share scheme provides employees with a contractual right to a cash bonus when certain KPIs or events are achieved.
Phantom share schemes are often favoured by companies with a strong profit share focus, while maintaining control of the company’s equity.
The scheme includes the benefits of formal share ownership, without requiring physical shares to be transferred to the employee.
For a chat about what kind of employee share scheme might be right for your company, get in touch.
Now for the legal bit
This article is for informational purposes only and contains general information only. Sharesies is not, by means of this information, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This information is not intended as a recommendation, offer or solicitation for the purchase or sale of any options or shares.
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