ESOPs – time to fix the Securities Act
Employee Share Option Programmes (ESOPs) are an essential tool for any early stage business. We use them to incentivise and align staff when cash is in short supply. So why have we just had to spend over $10,000 in accounting and legal fees to implement one? Because the New Zealand Securities Act does not work for early stage entrepreneurial companies. The Act is designed for the big boys and is a blunt instrument for the little fellas.
The Act requires young NZ companies that issue shares to staff that do not fit the definition of eligible persons to file a prospectus with the Secruities Commission. This prospectus must include:
- either audited accounts (who does those in a start up business?) or management accounts that comply with formal accounting standards; and
- a share buy-back provision in the event that employees leave.
Both of these provisions are completely unworkable for businesses that are not cash-flow positive and the net impact is that either company Directors ignore the Act (at their peril) or staff are denied the opportunity to be rewarded for the risks they take in working for young start-up companies.
The solution is obvious and has been promoted in the past and that would be to create a carve or exemption for start-up businesses. This could be time bound or linked to positive EBIT performance. Practically there are always definitional issues with these sort of exemptions but the materiality would seem to be very small versus the pain and lost opportunity that the Act currently creates. Unfortunately this is a fix that seems to consistently fall down the priority list.
In my view fixing these sort of issues are a priority as they will, in the long-term, support the development of an entrepreneurial growth economy – something that’s been very topical over the last 10 years.