Employee share ownership plans will help start-ups retain talent

An employee share ownership plan (ESOP) enables employees to become shareholders of the company, fostering a strong sense of ownership, motivation, and talent retention.

This strategic approach has been widely embraced and implemented by employers, serving not only as a means of financing but also as a powerful tool for cultivating employee engagement and commitment.

The plan works well when a company sets up an ESOP trust and allows employees to buy shares from the existing owners at a fair market value or the company issues new shares to employees based on defined criteria that could include relative pay, seniority or even years of service in the company.

The company has the flexibility to offer shares to its staff at either market price or discounted rates, with the underlying belief that the shares will appreciate over time, thereby providing substantial value to the employees in parallel with the value they contribute to the shareholders.

The Finance Act, of 2023 has good news for start-ups that intend to pursue the ESOPs option as a growth and employee motivation strategy as it provides for the deferment of the taxation of shares issued to employees in lieu of cash.

These will now be taxed within thirty days of the earlier of the expiry of five years from the end of the year of the award of the shares; the disposal of the shares by the employee; or the date the employee ceases to be an employee of the eligible start-up.

To qualify for this benefit, the entity must fall within the ambit of the start-ups for purposes of the ESOP benefit under the Finance Act, of 2023.

It should have an annual turnover of not more than Sh100 million and not be engaged in the provision of management, professional or training business services.

Subsequently, the entity should be less than five years old and ought not to have been created because of a split or restructuring of an existing entity.

ESOPs present a multifaceted opportunity for start-ups, enabling them to not only raise capital but also foster employee engagement and instil a sense of ownership throughout their growth journey and across various developmental stages.

The writer is a Senior Tax Advisor with KPMG Advisory Services Limited. [email protected]