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Team ESOP Explainer | NZ

Disclaimer: This is a general education session. It is not for the purpose of receiving advice (we recommend discussing specific scenarios with a suitably qualified advisor).

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How to use this template

Nothing good in life comes easy. We've done some of the heavy lifting for you, BUT you will still need to review this presentation and add some flavour (ie. specifics of your company ESOP).

Pre-set assumptions in this presentation:

Employees have the ability to exercise options before a liquidity event
Employees will be responsible for any tax liability
If neither of these^ apply for you, then please edit references to exercising and tax (slides 26 - 29)

Review the speaker notes and slides:

Add in your company logo where it says [Add company logo] on each slide
Slides 13-17 and 20-24 have an example of a grant in Orchestra’s demo company (Conductr Ltd). You’ll get bonus points if you update the grant terms (i.e. exercise price and vesting terms) to reflect the common offer your team will be receiving and replace these screenshots with your own Orchestra profile.

Add your own company’s FAQs:

On slides 30-31, we have included FAQs such a “what happens to my vested and unvested options if I leave the business?”. These answers will vary company to company.
Recommend creating an Appendix slide(s) with screenshots of the relevant section of your ESOP plan rules that cover these points. That way, you can share this pack with your employees following the session.

Delete this slide when you’re ready!

Complete a practice-run with your leadership team to ensure they can advocate for your ESOP plan on your behalf to ensure that it lands well, and it’s understood by all eligible employees.

Remember, this is all to get the conversation going. It won’t stop here, but it opens the dialogue to create an ownership mindset within your company.

Have fun with it!

Why we’ve made this template:

Feedback from leaders that ESOP is generally poorly understood, underappreciated.
If an employee doesn’t understand it, it's not tangible. Feels like a shame and missed opportunity from a company leader’s point of view.
Some common confusions we look to address:

Feels like there is an up front obligation or risk of signing up to ESOP - eg. “I have to pay tax straight away”
Basics of a grant lifecycle. “What is a vesting schedule?”
Thinking exercising = selling or getting paid out for shares
How are the shares valued - what would this grant be worth?

What this template is:

All Hands session template for leaders to run with the team, that demystifies ESOP to the team in less words, with more visuals and - hopefully - some fun & useful household analogies.
It’s more powerful when this is communicated by the leaders. It also creates a space for the group to ask questions, while anyone who has had experience with ESOP in other companies can chime in from their experience.
This version is written with an NZ audience in mind.

If you would like to speak to the team at Orchestra.io for help with setting up and administering an ESOP and bringing it to life for your team - please book a call with one of the team.

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Today’s agenda

Why offer an Employee Share Options Plan (ESOP)?
What is ESOP?
An overview of the terms and lifecycle of an ESOP
Common questions and key plan rules

TEAM ESOP EXPLAINER

[Company logo here]

Disclaimer: this is a general education session. It is not for the purpose of receiving advice (we recommend discussing specific scenarios with a suitably qualified advisor).

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Employee share option plans have been used for many years as a tool to reward, retain and attract talent by offering employees a stake in the companies they work for.

[Company logo here]

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Why is this a benefit for you?

This is a clearly defined pathway to becoming a partial owner in the business you work.

Wealth creation*

It’s a win, win. Higher company value = higher employee options value.

Recognition for you

Acknowledging you and the value you bring to the company.

Clarity and trust

More context and understanding to help you succeed.

*The value of employee share options can rise or fall depending on various factors such as market conditions, company performance, and investor sentiment.

TEAM ESOP EXPLAINER

[Company logo here]

Why is this a benefit? Why do we think it's something to be excited about?

Three key reasons for you:

It's a potential path to wealth creation because you have the opportunity to share in the potential financial upside of the business. As owners there is an added incentive to help the performance and growth of the company - the more valuable the company becomes the more valuable your share options are. It's a win-win. (NB: We have added a small disclaimer that the value of employee share options can rise or fall depending on various factors such as market conditions, company performance, and investor sentiment.)
It acknowledges that you are an important part of the fabric and your contribution is valued in the company.
More context and incentive: As an employee owner you have access to greater transparency of how the company is performing and its strategy - this helps provide context for you in your role and the decisions you make.

Some research snippets if useful…

Employee engagement & retention is higher - A survey conducted by the Employee Ownership Foundation found that 67% of employee-owned companies reported increased employee productivity, and 63% reported higher employee retention rates. (2018)
It supports positive culture and a sense of belonging - Companies with share ownership in their pay package are associated with high-trust supervision, participation in decisions, and information sharing, and with a variety of positive perceptions of company culture. (Blasi, Freeman, & Kruse, 2006)
Stronger company performance & productivity - SME's with a share scheme had a 94% growth rate in sales and a 56% growth rate in value add per employee over a three year period, compared to 62% and 29% respectively for SME's without an ESOP (ABS, 2015)

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Why is it a benefit?

Why have we set it up?

[Having more “owners” gives employees greater transparency and empowerment]
[Key for talent attraction and longevity?]

Key principles

Employees it’s being offered to?

When are they issued? (is it annual or a one-off)?

Are the amounts offered tiered or based on other factors? (worth explaining that a pool is fixed, but may be topped up at a future raise )
What happens for new starters?
Intention is to give quarterly updates on the business or key events?

[Company logo here]

TEAM ESOP EXPLAINER

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There's no better way to tune people in to creating value than to make them shareholders… I do know it gave our people more understanding and a sense of responsibility for what was going on in the company… in my view it's a win-win."

DAVID THODEY

Chair of the Board, Xero

[Company logo here]

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What is an employee share ‘options’

plan (ESOP)?

ESOPs have been around in various forms since 1956
They are very common incentives overseas, particularly in the USA
Facebook, Microsoft, Google and Amazon are example companies who use ESOPs to attract and motivate the best employees through an ‘ownership’ mindset
There is a growing, vibrant community of private companies in New Zealand offering ESOP

“Having staff who are literally invested in the company means we have a highly engaged team who feel looked after.”

– Hannah Bennett, Sharesies

TEAM ESOP EXPLAINER

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Bonnie Browne, a part-time in-house �masseuse at Google becomes a multimillionaire

Source here: The New York Times, 2007

[Company logo here]

TEAM ESOP EXPLAINER

Here's a good ESOP story (https://www.nytimes.com/2007/11/12/technology/12google.html)
Bonnie Brown was offered a part-time in-house masseuse job at Google, which started out at $450 a week but included a pile of Google stock options that she figured might never be worth a penny.
After five years of kneading engineers’ backs, Ms. Brown was able to happily retire by cashing in most of her stock options, which were worth millions of dollars at that time.
Today, she lives in a 3,000-square-foot house in Nevada, gets her own massages at least once a week and has a private Pilates instructor. She has traveled the world to oversee a charitable foundation she started with her Google wealth.
IMPORTANT CAVEAT: While these stories are inspiring… it's essential to remember that not all (rather, very few!) stock options will lead to extraordinary wealth.

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So, what are share “options”?

Employees are given the right to buy (‘exercise’) the company’s shares in the future, at a predetermined price.

This gives employees the opportunity to benefit from a potential increase in share value, without having any initial outlay of cash.

[Company logo here]

TEAM ESOP EXPLAINER

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So, what are share “options”?

Imagine an “option” for buying your home…

[Company logo here]

TEAM ESOP EXPLAINER

🏠

Find dream home

Get a agreement for option to buy it for $500. No deposit or obligation!

Market value goes up to $1,000

Decide to buy @ $500

Ten years passes

📃

Set price

📈

🏡

🤝😎

⌛

Real estate / home-buying analogy*

Imagine you've found your dream home to buy…
You're unsure though - is now the time to buy? Will the property go up or down with the economy.
You get given a contract that says you have the right to buy the property at a set price of $500 (joke: doesn’t apply to Auckland houses) that expires in 10 years
You don't have to put a deposit down.
Fast forward ten years, the property's value increases to $1,000.
If you decide to exercise the option, you can purchase it for the $500 and profit from the appreciation.
That's the beauty of options: there's no up front cost for the opportunity to benefit from a potential increase in value. It’s a common myth that by accepting ESOP you’re signing up to something that you now are liable for or have an obligation to do something with.
[Hold the tax questions for now - we'll cover it later]
*note: if you don't like the property analogy, swap it out for something else eg. lotto ticket, sports bet, mystery box or drop it altogether.

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How does it work? The lifecycle of options

OPTIONS OFFERED

Share options are granted at a set exercise price.

OPTIONS VEST

The right to exercise your options is earned.

EXERCISE OPTIONS

You choose to purchase company shares at the exercise price.

SELL OPTIONS

You sell your shares (typically at an ‘exit’ milestone such as an acquisition or IPO event.

1

2

3

4

[Company logo here]

TEAM ESOP EXPLAINER

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Key ESOP ‘grant’ components

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

The specific number of company shares you have the opportunity to purchase (‘exercise’).

[Company logo here]

TEAM ESOP EXPLAINER

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Key ESOP ‘grant’ components

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

The set (fixed) price to buy each share i.e. ‘strike price’.

[Company logo here]

TEAM ESOP EXPLAINER

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Key ESOP ‘grant’ components

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

The criteria for how share options are earned.

TEAM ESOP EXPLAINER

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Key ESOP ‘grant’ components

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

Minimum hurdle at which options become ‘vested’ (i.e. earned).

TEAM ESOP EXPLAINER

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Key ESOP ‘grant’ components

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

Deadline by which share options must be exercised.

[Company logo here]

TEAM ESOP EXPLAINER

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What could your ESOP grant be worth?

[Company logo here]

TEAM ESOP EXPLAINER

	Scenario 1	Scenario 2	Scenario 3
Number of share options	100	100	100
Exercise price per share	$1	$1	$1
Cost to exercise	-$100	-$100	-$100
Total company securities (shares)	10,000	10,000	10,000
Company valuation	$10,000,000	$1,000,000	$10,000
Market value price per share (total securities / valuation)	$100	$10	$1
Value of share options	$10,000	$1,000	$100
Benefit if shares are sold (eg. company is acquired)	+$9,900	+$900	+$0

Depends on the value of the company…

*Disclaimer: The above is a simplified example for educational purposes only. For example, it does not take into account potential factors such as liquidation preferences, potential tax liability etc.

What is the value of my options?

It all depends on the valuation of the company… let’s go through some examples.
For each scenario we have the same number of options and the same exercise price per share. What has changed in each one is what the company is worth, which - all things being equal - increasees the value of each share option you hold.
Note: ideally update the table figures to better reflect your company position.
The market value share price is usually determined through an external valuation, a capital raise valuation, or a recent share transaction event. [Specify if Company X has a valuation share price and what it’s based off]
Note: AirTree have created a comprehensive free calculator to help staff determine the potential value of their ESOP. Note that you will need to create a copy and enter in the relevant details for your company such as valuation of the company at the last raise, fully diluted securities etc.

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How does it work? The lifecycle of options

OPTIONS OFFERED

Share options are granted at a set exercise price.

OPTIONS VEST

The right to exercise your options is earned.

EXERCISE OPTIONS

You choose to purchase company shares at the exercise price.

SELL OPTIONS

You sell your shares (typically at an ‘exit’ milestone such as an acquisition or IPO event.

1

2

3

4

[Company logo here]

TEAM ESOP EXPLAINER

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An illustration for the lifecycle of an options grant

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

[Company logo here]

TEAM ESOP EXPLAINER

“Grant”

“Unvested”

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An illustration for the lifecycle of an options grant

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

[Company logo here]

TEAM ESOP EXPLAINER

“Unvested”

“Vested”

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How does it work? The lifecycle of options

OPTIONS OFFERED

Share options are granted at a set exercise price.

OPTIONS VEST

The right to exercise your options is earned.

EXERCISE OPTIONS

You choose to purchase company shares at the exercise price.

SELL OPTIONS

You sell your shares (typically at an ‘exit’ milestone such as an acquisition or IPO event.

1

2

3

4

[Company logo here]

TEAM ESOP EXPLAINER

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An illustration for the lifecycle of an options grant

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

[Company logo here]

TEAM ESOP EXPLAINER

“Unvested”

“Vested”

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An illustration for the lifecycle of an options grant

Share options(#): 1,000

Exercise price: $1

Vesting: 3 years, quarterly

Cliff: 12 months

Expiry: 10 years

[Company logo here]

TEAM ESOP EXPLAINER

“Unvested”

“Vested”

Back to the “Grant”

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How does it work? The lifecycle of options

OPTIONS OFFERED

Share options are granted at a set exercise price.

OPTIONS VEST

The right to exercise your options is earned.

EXERCISE OPTIONS

You choose to purchase company shares at the exercise price.

SELL OPTIONS

You sell your shares (typically at an ‘exit’ milestone such as an acquisition or IPO event.

1

2

3

4

[Company logo here]

TEAM ESOP EXPLAINER

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What are the tax implications of exercising?

[Company logo here]

TEAM ESOP EXPLAINER

Tax will typically apply at the point of exercising options and most commonly the responsibility of the employee
The taxable amount is calculated on the difference between the market value of the shares at the date of ‘exercise’ and the value at the ‘strike price’. This will be your taxable income
Even if you are not selling your new shares immediately, you will still pay tax on the capital gains

*Disclaimer: The following NZ examples provided are for educational purposes only and should not be considered as specific or professional advice. The examples presented may not reflect your individual circumstances or the specific tax regulations applicable to your situation. Consult with a qualified tax professional or financial advisor to obtain accurate and personalised advice regarding the tax implications of an Employee Stock Ownership Plan (ESOP) or any other financial matters.

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Tax implication when exercising options

[Company logo here]

TEAM ESOP EXPLAINER

Example of holding 100 share options, with $1 exercise price per share

Example 1: Market value = $10 per share

Market value ($1,000)

What you paid ($100)

Market value is greater…�Taxable amount = $900

SHARE PRICE (MARKET VALUE)

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Tax implication when exercising options

[Company logo here]

TEAM ESOP EXPLAINER

Market value ($400)

Market value is greater…�Taxable amount = $300

What you paid ($100)

Example of holding 100 share options, with $1 exercise price per share

Example 1: Market value = $4 per share

SHARE PRICE (MARKET VALUE)

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Tax implication when exercising options

[Company logo here]

TEAM ESOP EXPLAINER

If market value is equal or less�Taxable amount = $0

What you paid ($100)

Market value ($100)

Example of holding 100 share options, with $1 exercise price per share

Example 1: Market value = $1 per share

SHARE PRICE (MARKET VALUE)

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FAQs: “What if…”

[Company logo here]

TEAM ESOP EXPLAINER

I leave? 👋

We raise more capital? 💰

We ‘exit’ (sell or list on the public market) 🤝

[Your answer here - common is that unless you are a bad leaver (misconduct), then vested shares will be available to exercise for a limited period of time and any unvested shares are forfeited and returned to the pool for reallocating]

[Your answer here - common is that the ESOP pool will usually get topped up. It’s also a place to talk about dilution ie. the ownership % of the share options will decrease, however the value may be higher (depending on the valuation).

[Your answer here - common is all share options are vested (‘accelerated vesting’), exercised and sold at the transaction event]

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FAQs

[Company logo here]

TEAM ESOP EXPLAINER

What is the market value of a share option in [X company] today?�[Your answer here - what valuation method has the company used for this?]

What happens to any exercised shares if I leave (i.e. is there a buy-back?)?

[Your answer here]

Is exercising the same as selling shares?

Short answer: no.

�

Why will my shares be held by a [nominee] or a [trust]?

[Your answer here]

�

How could I sell my shares?

[Your answer here - what liquidity options will there be (if any?)]

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Questions.

[Company logo here]

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Next steps.

[Company logo here]

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Appendix.

[Company logo here]

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How to exercise your options

Login to Orchestra and get the process started by notifying the support team.

[Company logo here]

TEAM ESOP EXPLAINER

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How to exercise your options

Once completed, you will receive a confirmation and formal shares will be issued in Orchestra.

[Company logo here]

TEAM ESOP EXPLAINER

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What is the process for declaring tax?

[Company logo here]

TEAM ESOP EXPLAINER

*Disclaimer: The following NZ examples provided are for educational purposes only and should not be considered as specific or professional advice. The examples presented may not reflect your individual circumstances or the specific tax regulations applicable to your situation. Consult with a qualified tax professional or financial advisor to obtain accurate and personalised advice regarding the tax implications of an Employee Stock Ownership Plan (ESOP) or any other financial matters.

Employee Pays

Employer Pays

Employee completes exercise notice

Employer determines the ‘market value’ for the shares (and taxable $ gain)

Shares are issued

ESOP Deferral Date (+20 days). Employer declares info via payroll filing (employee name, IRD, “extra pay”)

Employee pays tax via auto-assessment or IR3

Employee completes exercise notice

Employer determines the ‘market value’ for the shares (and taxable $ gain)

Shares are issued

ESOP Deferral Date (+20 days). Employer declares info via payroll filing (employee name, IRD, “extra pay”)

Employer pays tax via PAYE

Employer lets employee know of their tax obligation (best practice)