ESOPs
- An Employee Stock Options Plans (ESOPs) is an employee benefit scheme.
- That scheme provides an option but not an obligation to employees to acquire shares of a Company at a future date at a pre- determined price (discounted price).
- Through ESOPs scheme a Company make an allocation of shares that would be granted to employees in future in the form of Stock Options.
- ESOPs scheme covers certain conditions upon fulfilment of which Grant shall be done.
KEY BENEFITS OF ESOPs
Improved Recruitment and Retention
ESOPs improves retention rates due to the long-term benefits associated with Stock Options.
Promotes Employee Involvement
By making employees equity owners, it gives motivation to the employees in achieving Company’s goal.
Use as a Part of Compensation Package
To bridge the gap between employee expectation for remuneration and Company’s ability to pay, ESOPs use as a tool to supplement the remuneration package.
Twin Fold Purpose
It work to achieve twin-fold purpose both for the Company and the employees.
IDEAL STAGE TO IMPLEMENT ESOPs
Pre Seed
Founders focused on traction. Key employees are given equity/ options on an ad-hoc-basis.
Seed
First outside financing round. Institutional investors will require an ESOPs.
Venture Capital
Prior to VC funding round.
Growth
Company aggressively pursuing growth and hiring; Likely to have exhausted most of the ESOPs.
Listing
Before going for public offer.
KEY TERMS
Listing
Before going for public offer.
KEY TERMS
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Options: |
Means the right given to Eligible Employees pursuant to Employee Benefit Scheme, to purchase or subscribe the equity shares offered by the Company at a future date at a pre-determined price. |
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Grant: |
Offering of Options to employees under Employees Benefit Scheme. |
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Grant Date: |
The date on which the Options are granted to the Eligible Employees. |
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Vesting: |
The process by which the Option Grantee gains the rights to apply for shares against the Options granted to him. |
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Vesting Conditions: |
The conditions that must be satisfied by Option Grantee before applying for shares of the Company against the Options granted to him. That condition can either be Service Conditions or |
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Vesting Period: |
The period during which the vesting of Options takes place. It is a period between Grant Date and Vesting Date. |
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Exercise: |
Means making of an application by Option Grantee to the Company, for issue of shares against Options vested. |
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Exercise Date: |
The date on which the Option Grantee exercise his right to purchase or subscribe shares of the Company. |
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Exercise Period: |
The time period post vesting of Options, within which the Option Grantee has a right to buy the shares against Options vested. |
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Exercise Price: |
It is a price at which employee exercise the Vested Options. |
STEPS IN ESOPs
GOVERNING LAWS
- Companies Act, 2013/ Companies (Share Capital and Debentures) Rules, 2014
- SEBI (SBEB) Regulations, 2014 (Applicable on: Listed Company)
- SEBI (LODR) Regulations, 2015 (Applicable on: Listed Company)
- SEBI (PIT) Regulations, 2015 (Applicable on: Listed Company)
- Foreign Exchange Management Act, 1999
- Income Tax Act, 1961/ Income Tax Rules, 1962
TYPES – SHARE BASED BENEFIT SCHEME
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Employee Stock Options Scheme (ESOP) |
Employee Stock Purchase Scheme (ESPS) |
Stock- Appreciation Rights Scheme (SAR) |
Restricted Stock Units (RSU) |
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– Option to employee – To Purchase/ Subscibe to Shares – At a future date – At a pre determined price
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– Shares issued at a part of Public Issue/ Otherwise – Employees are granted rights to acquire shares at discount
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– Employees are given notional units with a right to exit at a future date – Equity or Cash settled
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– Allotment of Shares come with certain conditions – Conditions can be Revenue/ Target/ Performance Base
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ESOP STRUCTURES
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Direct Route |
Trust Route |
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• Scheme implemented/ administered directly by Company • Fresh issue of shares upon exercise of Options • Preferred route by Private/ Unlisted Public Company • Less Complex |
• Scheme implemented/ administered directly by Company • Trust first acquire shares of the Company and later transfer it to employees upon exercise of Options. • Mandatory to implement through trust if secondary acquisition or gift involved • More complex as compare to direct route |
For further details please refer ESOP Presentations….
