Building an ESOP for your Private Limited Company

Last Updated at: Dec 03, 2020
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To save employee costs during the COVID-19 scenario, businesses are turning to ESOPs ( Employee Stock Options Plan).  Companies such as Zomato, Paytm and OYO have allocated ESOPs to make up for any salary cuts, retaining their services at the same time.

 

The one question every business has to ponder is how to motivate employees to remain loyal to them. This article’s goal is to answer the question in depth. To that end, it explains what are ESOPs, who is eligible for them, and what are its unique features?

All entrepreneurs have at least one common problem: how to motivate employees in a way that’s beneficial to the company and themselves. The most practical solution to this is the employee stock options plan (ESOP), used by small and large businesses alike. It not only keeps deserving employees motivated to grow your company, rather than just fulfill their duties, it ensures that you don’t lose them for a number of years.

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In an ESOP, companies (only private and public limited companies can offer them) provide their employees with stock ownership, often at no up-front cost, but in lieu of work performed. Shares are allocated to employees, but may vest only after a pre-defined period or even held in a trust until the employee retires or leaves the company.

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Features of ESOPs

1. ESOPs have a pre-determined price. An employee has a right to buy the shares in your company, as per the allotment, at this price, regardless of the present value of the shares. The employee does not have to purchase the shares; he/she is merely given the right to.

2. ESOPs have a vesting period. Usually, the shares vest upon the employee at specified intervals. Therefore, if the vesting period is four years, a quarter of the shares would vest upon completion of each year. In case the employee leaves the company, he no longer has the option to buy the shares.

3. Employees may sell the shares, once vested, but cannot transfer the option to buy the shares to any other person. This ensures that employees are only rewarded if they themselves stick with the company.

Who is Eligible?

1. Permanent employees who have been working in India and outside India

2. Director of the company, whether whole time or not

3. employees as defined in (a) or (b) of its subsidiary company, in India or outside India

4. employees as defined in (a) or (b) of its holding company

5. employees as defined in (a) or (b) of its associate company

Who is Not Eligible?

1. Independent Directors

2. Employee belonging to the Promoter group

3. Director who either himself or through his relative or a body corporate, directly or indirectly, holds more than 10 per cent of the outstanding equity shares of the Company.

To conclude, an employee stock options plan is the most practical solution to ensure deserving employees are motivated to stay loyal to a firm. Both small and large businesses utilise ESOPs. All permanent employees are eligible for it barring independent directors and employees of the promoter group.