Employee shares are certificates of ownership in a publicly traded company which are offered by the company to its employees. These may be offered to employees at preferential prices or given to employees as a benefit or as part of their salary.
The most common reason why companies issue employee shares is to encourage employee participation and loyalty. Employee shares also provide companies with few cash assets with a means through which they can hire employees without having to pay cash for services rendered. In this arrangement, employee shares act as an incentive to employees to drive up the value of a company in order to benefit from capital gains.
However, the value of employee shares is directly linked to the value of the corresponding company and to the liquidity of the company’s stock. If the company is not publicly traded, employees may find it difficult to sell employee shares and thus convert them into cash. Possible rules aimed at preventing conflicts of interest can also affect employee’s ability to sell their shares.
The value of employee shares is also affected by a company’s ability to issue new shares. Employee shares are more valuable if the issuing company’s statutes state that the company must obtain the approval of a majority of its employees before issuing new shares, because issuing new shares can negatively impact the value of employee shares.
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