Should Your Company Offer ESOPs?
One of the greatest challenges your startup or small business faces is employee retention. Due to the massive competition in the market, quality employees have a range of employment options. Hence, one of the ways to not only retain but also have your employees feel more invested in your business is to give them ESOPs, or Employee Stock Options.
But providing ESOPs is not without risk for your company, so should you offer ESOPs?
How much control are you willing to lose? Though you may have started your business with a singular vision, ESOPs can change that. Depending on which type of ESOPs you opt for, the circle of decision making grows. ESOPs involve employees to help steer the company.
This can be an advantage as your company matures and grows beyond just your vision. However, if this is not your aim or to your liking, then avoid ESOPs.
This brings you to next point. Giving ESOPs will transform your company. If your vision is to have a growing and large organization, then ESOPs will work for you. However, if your organisation is not a large one and you have no intention of making it one, then ESOPs may not fit into that vision.
If your business is a partnership or a corporation, you don’t make the decisions on your own. You’ll have to discuss it with your partner and go over it with the board of directors, as they hold you accountable for the management of the company.
You need to get their agreement before you can move forward.
There will be internal restructuring when you have ESOPs. This is because your company will function slightly differently once it’s incorporated, especially depending on the type of ESOPs you offer.
You can create a limit to who can get ESOPs based on the person’s position in the company hierarchy, the time period the person has stayed with the organisation, or a nomination process.
This will create structural changes in your organisation since your employees will have more power. One company failed to change the structure and employee owners called meetings and made decisions weekly without including senior managers.
Have a strong management.
Be ready to go through the process of educating your employees. Not only on the ESOP option but also the various structural changes that will be taking place.
Your reason for ESOPs should not be to retain employees. It just happens to be one of the benefits that you offer. Employees decide to remain in a company for multiple reasons, such as salary, job satisfaction and the office environment. There is no golden bullet to retain employees and ESOPs are certainly not one of them.
ESOPs affect the taxes that you deduct from your employees’ incomes. Employees can buy the stock at a discounted rate. For example, the stock of your company is at $100 and you offer $30 discount. CRA requires that the $30 be treated as income so you will need to deduct tax at the source for that amount.
Should you offer your employees ESOPs? If these various points fall within the preview of your company, it is a viable option.
Lastly, it is always advisable to have a legal consultation. Every owner and company’s situation is different, hence, it is best to get customized advice.