The document outlines the key aspects of employee ownership structures, specifically discussing phantom shares and options as tools for incentivizing employees and aligning their goals with company performance. It covers reasons for implementing these structures, their tax implications, compliance requirements under the FMCA, and considerations for designing compensation plans. Practical examples illustrate how these mechanisms can operate, highlighting pros and cons of each approach along with necessary documentation.

1. NZTE Capital
Education
Webinars - ESOPs
Specific advice should always be obtained before relying on any
aspect of the content of this presentation or associated materials.
30 June 2016

2. Topics covered today…
• Reasons
• Choices
• Tax
• FMCA
• Design
• Documents required
Page 2

3. Reasons why?
• Reward (for past performance)
• Incentive (for future performance)
• Attract (where cash alone is not
enough/salary sacrifice)
• Align (for a common goal)
• Succession (as a controlled migration)
Page 3

4. Some of the choices…
Not an exhaustive list – key principle, keep it simple!
Page 4
Phantom Shares Options
Overview: A contractual obligation
to pay a bonus in the future
typically referable to performance
of the company with reference to
dividends or share value (or both).
Overview: Issue of shares by the
company (or transfer by a
shareholder) to an employee for
cash consideration
Overview: An option to acquire a
share in the future at a pre-defined
price and possibly upon achieving
pre-defined circumstances
When to use:
• Cash-generating business e.g.
professional services
• Equity may not be available/
accessible
• LTIP equivalent
When to use:
• Predictable business
• Profitable and dividend-
generating
• Pay-up founders/ sweat equity
• Contra deals e.g. shares for
services
When to use:
• High growth companies
• Cash poor companies
• Forward incentivising
• Conditional offers

5. Some of the choices… continued
Page 5
Phantom Shares Options
Pros/cons:
 Flexible
 No shareholding issues
 May not need valuation
 No change to SHA/ Constitution
 No FMCA compliance
 No liquidity event required
ₓ Conceptually hard to understand
ₓ Cash required to fund payments
ₓ Payout formulas can be complex
Pros/cons:
 Brings the person in the tent
sooner
 Creates skin in the game
 Tax efficient (capital gains)
ₓ Full value needs to pass for the
shares
ₓ Valuation needed to be agreed
upon
ₓ Need to organise SH
arrangements (SHA, Const)
ₓ Can create misalignment if
dividends are being used to
fund acquisition
Pros/cons:
 Simpler than shares
 Easier to create alignment
 Easier to claw back if KPIs not met
 Defers SH rights (e.g. voting and
participation)
 Internationally understood
 Understood by investors
ₓ Employees may see as limited in
value
ₓ Managing an options register
ₓ Possible tax bill on exercise
ₓ Get counted when taking
investment – fully diluted basis

6. Fundamental tax rules and treatment…
Page 6
Phantom Shares Options
• Taxable when paid (need to be
careful to ensure payment is not
deemed to arise earlier than cash
is actually transferred to
employee)
• PAYE deducted by employer – no
employee tax obligations
• Employees taxed on value of
the shares when they receive
them less amount paid for
shares
• Employee liable for the tax –
provisional tax rules may apply
• From 2017-18 employer can
elect to pay PAYE on any benefit
• Employee may hold shares on
capital account – no tax on
future gains!
• Employees taxed on value of the
shares when they exercise the
option less amount paid to
exercise option
• Employee liable for the tax –
provisional tax rules may apply
• From 2017-18 employer can elect
to pay PAYE on any benefit
• If employee intends to sell shares,
likely to be held on revenue
account (taxable) but if sell
immediately may have no gain (or
loss)

7. Practical examples…
Page 7
Phantom Shares Options
Year 1
• Company has EBITDA of $1m
• EBITDA multiple of 5
• Company value therefore $5m
• Employee given 10% of growth in
value over 3 years
Year 4
• Company has EBITDA of $2m
• EBITDA multiple of 5
• Company value therefore $10m
• Employee receives cash bonus of
10% x ($10m - $5m) = $500k
• Tax deductible for company/
taxable for employee
• Issue 10% shares when
company value $1m (post issue)
• Lend employee $100k
• Pay employee $150k of bonuses
over time
• Employee has $100k after tax –
repays loan
• Company has $150k tax
deduction for bonuses
• Company – net outflow :
-$100k + $100k - $150k x 72%
+ $100k = -$8k
• Employee – neutral
+$100k - $100k + $150k x 67%
- $100k = $0
but has shares of $100k
• Potential tax free capital gain!
• Issue option to acquire 10% of
company when market value $1m
(post issue) with an exercise price
of $100k
• Exercise option when company
worth $10m
• Employee receives $1m value of
shares, pays $100k for option, has
tax to pay of $297k
• Assuming employee sells all
shares, net result $603k

8. FMCA compliance
• WARNING statement – prescribed form
• Applies to directors, employees or contractors (principally
involved in providing services to the Company)
• Must be made as part of the participant’s remuneration or in
connection with his/her engagement
• 10% cap in any 12-month period
• Raising capital must not be the primary purpose of the offer
• Must give to the participant:
 an overview of the scheme
 most recent annual report and financial statements, or how to
obtain them
 statement on whether the financial statements are audited or not
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9. Designing a plan…
• Allocations:
 Who gets a piece of the action?
 How much is up for grabs?
 One off or yearly or long term?
 Who controls allocations?
• Pricing/strike price:
 Setting a valuation
 Factor in past reward/future incentive
 International overlay on strike price
 Investor approach on fully diluted basis
• Sunset:
 How much is enough time?
 When can you bring forward?
Page 9

10. Designing a plan…
• Vesting:
 What is it?
 How much is caught by vesting?
 Will there be cliffs, and if so, yearly or monthly
or both?
 Acceleration – when can it occur?
 Outs – ability to reward if choose?
• Exits:
 What happens?
 Does this change if it’s a “successful exit”?
 IPOs – dealing with lock ups and tax bills
Page 10

11. Designing a plan…
• Good/bad leaver:
 Should you have good/bad leaver provisions?
 What is a good leaver?
 Penalties for being a bad leaver?
 When is long enough to tie people up?
• Nominees/trustees:
 When is best to use?
 How do they work?
 Use as a tax tool?
Page 11

12. Required documentation…
Page 12
Phantom Shares Options
• Grant document
• DR resolution
• Subscription agreement
• Invitation letter (FMCA)
• DR resolution (and
possibly certificate)
• Shareholders’
agreement/ accession
deed
• SH approval
• Option agreement
• Invitation letter and
attachments (FMCA)
• DR resolution
• DR certificate
• SH approval