Alternative ESOP Funding Mechanisms

Share Plans can be funded in various ways using:

  •  Remuneration;
  •  Personal Loans;
  •  ESOP leveraging.

We have already discussed remuneration funding.   It is a prudent and effective way of funding a Division 13A Exempt or Deferred ESOP.  But there are other ways.  The two principal financing alternatives are Personal Loans and ESOP Leveraging.

Personal loans

Loan funding means that the company makes loans to individual employees.  The loans are then used to acquire the shares in the employer's company.

These Loan Plans have been popular in Australia.  They do not need to meet the requirements of Division 13A.  Consequently, it can be easier to design a suitable Loan Plan than an Exempt or Deferred Plan.  At the same time, Loan Plans can deliver benefits to employees that are comparable to, and sometimes superior to, what can be achieved under a Deferred Plan.

ESOP leveraging 

Leveraging share plans means that a third party lends to the share plan which uses the borrowed funds to acquire shares in the employer's company on behalf of the employees. 

ESOP leveraging is especially relevant to those situations where employees want to buy a large stake in a business, or to take it over altogether.

 

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