person working reviewing stock plans

Why You Should Offer an Employee Stock Purchase Plan

Posted April 19, 2017 by Kristin Hoppe in Benefits and Perks
Should you offer employee equity in your small business? We outline the benefits of offering an employee stock purchase plan.

When Isaac Oates bought shares in Etsy — a company still up-and-coming when he joined in 2009 — it fundamentally shifted the way he saw his work.

“My friends and I realized, wow we have some ownership over this. And we want the company to succeed,” said Isaac.

Now, as CEO and founder of Justworks, Isaac strongly believes in the ability for an employee stock purchase plan (ESPP) to empower his workforce.

The choice isn’t just about empowering your current workforce, either. Offering stock in your company also opens doors for a competitive recruiting advantage. According to a 2016 report by CNBC, 16% of workers said their ESPP is their most important benefit, up 10% from 2014.

Why ESPPs Work

If you’re considering whether to offer your own ESPP, here are some compelling reasons why it could be a positive decision for both your employees and your business.

Give Employees Ownership

Offering employees stock options is a powerful act. Once an employee has a real stake in the business, she may be more likely to think about the long-term health of the company and invest more in its ultimate success.

“Employees feel real ownership, and you get an educated citizenry when you offer shares or options,” said Isaac. “An employee base who is invested in the success of the company and who will protect the company just thinks differently. It’s helped our employees be more committed and engaged.”

According to Entrepreneur, many companies are thinking along the same lines: 47% of full-time workers in the U.S. have some form of ownership in the company employing them, whether that’s from profit sharing or stock options.

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Engage Employees Through Transparency

Many startups and even established companies issue equity or stock options but tell their employees little or nothing about the equity. That may include not disclosing the total number of shares, the valuation of the company, how much has been raised, of the preference structure in the stock.

However, this approach comes with a downfall. If employees don’t understand the inner workings of their share options, they may forgo investing in the company at all.

And as we’ve written before, employees who trust their employers are likely to have higher morale — which translates into higher productivity and more profit for the company. Isaac advises that transparency over opaqueness will strengthen your company and employee engagement greatly.

At Justworks, Isaac holds all-hands meetings to explain the ESPP and field questions about the process, such as:

  • What are stock options?
  • What is our capital structure?
  • What is corporate governance?
  • What does a board decide and who is on it?
  • What does it mean to exercise early?
  • What was the stock price at the last valuation?
  • What are the features of preferred stock versus common stock?

Attract the Right Kind of People

If your company isn’t long established, chances are there is risk involved. At that stage, it’s crucial to hire employees who are a right fit for the company’s risk profile. Offering stock is one way to find employees who are truly the best fit.

“If you have people who just want stability, they go crazy in a startup work environment,” said Isaac. “Offering equity is a nice way to help align that risk.”

Employers often set this up by including stock options in the offer package, which also may help temper sky-high starting salaries as well.

Offer Financial Advantages

Ownership in company stock gives employees the opportunity to invest on the ground floor and diversify their portfolios. It also opens the door to a potential windfall or bigger nest egg in the long-run.

                               

Other potential benefits abound as well. For example, if an employee owns share they exercise shortly after getting a grant, they may get no tax on the exercise at all. And, if they pay for their shares at the right stage, tax benefits are another possible win.

Conclusion

The benefits of offering ESPP are many, and employers could benefit from doing their research and decide if some kind of equity sharing is right for them. While smaller companies encounter more specific challenges to offering equity in their company, nonprofits like the National Center for Employee Ownership offer resources on how even partnerships and LCCs can create a legal structure for employee equity.

“The combination of offering employee shares and transparency around the process is so powerful,” said Isaac. “It’s really helped our employees feel like owners, and it’s an awesome feeling.”

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.