Finally – employee share option schemes that don’t suck!

For years, NZ tech start ups have been unable to establish employee share option schemes without risk of breaching NZ’s Securities Act.

Directors of companies that breach the Act are exposed to significant civil and criminal penalties, as well as the potential for lengthy bans from involvement with the management of companies.   Not surprisingly, tech companies have used employee share option schemes only sparingly.

This has been a massive source of frustration, both for founders who want to reward and incentivise staff involved in the risky business of getting a start up humming, and for those staff who reasonably would like to share in the upside they are helping to create.

Tucked away in a schedule to the Financial Markets Conduct Bill is a short section that will, if enacted, sweep away the current rules for employee share option schemes, and allow tech companies to implement these schemes with a minimum of legal fuss.

The Bill will allow companies to offer share options to their employees without the need for prospectus style disclosure and liability, subject to a few simple rules:

• the scheme must be a standalone offer – i.e. it can’t be made as part of a wider cap raise
• raising money must not be the primary purpose of the offer
• the maximum number of options that may be issued under a scheme in any 12 month period is 10% of the company’s total share capital (excluding non-voting shares)
• the offer must not be false or misleading, including by omission.

Offers of shares and share options to directors and senior executives of a company are excluded under a different provision, and do not count towards the 10% annual limit.  So in practice, very few companies are likely to find this annual ceiling a barrier to establishing and operating a scheme.

There is provision in the Bill for the enactment of minimum disclosure requirements for various categories of offer that are exempt from the main disclosure requirements of the Act.  It is not yet clear whether this will be required for employee schemes, but hopefully any disclosure required will be straightforward to complete.