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ESOP
ESOP (Employee Stock Option Plan) is an effective employee retention strategy with which a company provides stock options to its employees so that they stick around and remain motivated. It offers employees an ownership interest in the company.
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How does ESOP work for you?
You can now provide employees stock options and make it an effective employee rention strategy.
The grant of the option to purchase the shares
The agreement for the option to purchasethe shares
Creation of the master document for the ESOP
Employee Stock Option Plan
Companies manage and hire top talent with ESOP (Employee Stock Option Plan)!
It is an employee benefits scheme under which the company encourages the employees to acquire ownership in the form of shares at a predetermined rate. Usually, companies issue ESOP to employees to make them stay with their organization for a long time. It motivates the employees to perform better and offer their loyalty to the company.
Suppose an employee receives 400 shares. On completion of every 1 year, 100 shares will be vested. The valuation of the shares increases with the valuation of the company. This also keeps a check on the attrition rate.
Why should we use ESOP?
Benefits of Employee Stock Option Plan
Attract Top Talent
You may not be able to match their current salary, but an offer of shares in your company will be enough to attract the best talent.
Build Motivation
The better your business performs, the better your most talented employees will get paid. There's no better way to motivate them.
Keep Them Longer
The employees to whom shares have been allocated are almost certain to complete the four to five years you have defined as vesting period.
Checklist/ requirement for Employee Stock Option Plan
What are the types of ESOP?
Unleveraged ESOPs
Managing an unleveraged ESOP, a company performs periodic contributions to the plan, which are then used to buy shares in the company from current owners. These plans are also great ways to reward employees who stay with the company over extended time instead of the employees who are with the company at a single point in time.
Leveraged ESOPs
In leveraged ESOPs, a plan takes out one or more loans from a bank or other lender. These borrowed funds are used to buy shares in the company from its current owners. The company then makes regular contributions to the ESOP which are used to repay the loans. It has a better option for business owners who want to be bought out quickly.
Issuance ESOPs
Issuance ESOPs are the least common form of ESOP. It makes regular contributions to the plan consisting of newly issued shares of company stock rather than cash. It is a great choice for business owners who don’t want to contribute profits to the plan but instead want to issue new shares to the plan.
Who is eligible for ESOP?
According to the IRS (Indian Revenue Service), the maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she must be eligible for ESOP in the year of joining the company. An employer can restrict eligibility to employees with two years of service but only if the plan has immediate vesting.
How to structure an Employee Stock Option Plan
How to register an Employee Stock Option Plan
Draft The ESOP Rules
Your ESOP rules set out the terms that apply to all options granted under the plan, including the process for granting options, how and when employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves. The document will include the following schedules:
Approve The Rules And The Option Pool
Once you are satisfied with the ESOP rules, your directors and shareholders will need to sign some corporate approval documents to adopt the ESOP rules and set up your option pool.
Board And Shareholder Approval
There are some resolutions which include:
Shareholder Waivers And Consents
Your constitution and shareholder’s agreement may include pre-emptive rights on the issue of new shares. If this is the case, these shareholders with preemptive rights will need to sign a waiver in respect of any options granted the ESOP.
Grant your options
Prepare Your Directors’ Resolutions:
Each time you want to grant options, you should ask your corporate secretary to prepare a new set of directors resolutions in writing, approving the grant of options to a specific recipient.
Send Each Recipient Their Grant Letter:
Update Your Register Option
Internally, you should also be keeping an option register, which is a record of all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.
Documents required for Employee Stock Option Plan
FAQs on ESOP
Can a private company issue an ESOP?
Yes, the private limited company can approve ESOP to its employees subject to the limitation of the maximum number of shareholders.
What happens to an ESOP when the company is sold?
Usually, when a company is sold, the ESOP will terminate and the employee-owners receive cash proceeds for their company stock. In some cases, your company may be sold to a company with its own ESOP. Normally, this happens in a rollover of some or all of your ESOP shares into the shares of the new company ESOP.
Is ESOP good for employees?
Being a member of an ESOP company, it can provide unique rewards for employees. Participants in the plan can get significant retirement benefits at no monetary cost to them. Also, an ESOP is an excellent way to enhance the company’s ability to recruit and retain top talent.
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