Looking to compensate and retain your star employees with ESOPs?
What are 5 big problems startups face with ESOPs?
- How do we set it up? How to administer the ESOPS program over the years?
- How much does it cost to run this scheme and how to optimise costs?
- What are the few legal things I need to know about this?
- What are the tax implications of ESOPs? Is there a difference between how this works in US, Singapore and India?
- Can founders retain voting rights of shares given on ESOPs?
You might have heard the term ESOP flying around in executive conversations and might be thinking if this is something you can use to win and retain brilliant employees. Let’s talk about that.
One hour hands-on workshop for startup founders on how to set up and administer ESOP scheme
The Speakers Of The Webinar
CEO & CO-Founder, LawSikho
Co-founder and Chief Knowledge Officer, LawSikho
What is an ESOP
- An ESOP (Employee Stock Option) is an option (choice) provided to the employees of a company. They can, if they so wish, convert these options into shares of the company.
- It is an effective incentive as it creates the stake for an employee in the company. The shares in the company are provided to these employees at a discounted rate.
- An ESOP’s journey starts with the option being granted to the employee at a set price, with a vesting period which marks the start of the employee’s right to exercise the option, exercise refers to the buying of shares from the company and finally by a sale, the shares may be sold by the employee.
What does it do for your startup
Basically, a vested interest in the company influences the decisions of the employees since they now think like stock holders. Additionally, this increases employee retention as they view themselves as long term players for the company. A major proportion of Fortune Magazine’s Top 100 companies engage in employee based ownership programs such as ESOPs.
Who do you issue an ESOP to
As a startup, you can issue an ESOP to most of your employees, as mentioned below:
- The company’s permanent employees residing in or out of India.
- A part-time or full-time director of the company who is not an independent director.
- A permanent employee or director of a subsidiary company in or outside India, or an associate company or a holding company.
However, these two classes need specific attention-
- An employee belonging to a promoter group or the company’s promoter.
- A director who indirectly or directly holds over 10 percent of the outstanding equity shares of the company.
While other companies cannot issue ESOPs to the above two categories of people, startups are allowed to do this for a period of 10 years from inception.
How do you go about issuing ESOPs?
Here are some basics you need to know (these will all go into the making of an ESOP plan):
First things first, how many ESOPs should you issue in total?
Typically, ESOP pools are about 10-15% of the company’s shares in earlier stages. It is advisable to set up a double digit equity pool as opposed to a single digit one. You will also benefit by creating founder’s pools, co-founder’s pools at this stage - all this enhances your structural stability and gives you better odds at up scaling your startup.
How do you decide the price the employee needs to pay?
You may base it on your last funding round. If you’re bootstrapped, you can think of getting a valuation done specifically for ESOP purposes or alternatively, base it on taking multiples of turnover as a valuation.
Deciding the Vesting period
You must not rush with the vesting period; a healthy gap is required. This acts as an employee retention and security tool towards your business. A 4-year vesting period with a 1-year cliff is a good model to enforce. In any case, you do not want any lower than 1 year between the grant of ESOP and vesting of rights of exercise.
If you’re interested in how you can use ESOPs to get and retain talent, and have a lot of questions in your mind, don’t miss our webinar on the 24th of March, 2022 at 4PM where we will discuss some of the below questions:
- Is issuing ESOPs the right way to go for me?
- How do I decide how many ESOPs I should give and to whom?
- Can the employees get a lot of shares and vote against me as a founder?
- What if an employee sells their ESOP shares to a competitor?
- Are ESOPs a part of the CTC?
- Are future employees simply made a part of the existing ESOP plan?
- Can I have multiple ESOP plans in my company?
- Can I buy back the ESOPs?
- What happens to the ESOPs if the employee leaves or is kicked out?
- What if the company is acquired by someone? What happens to the ESOPs then?
- What happens to the ESOPs if we go for an IPO?
Landmark Cyber Park, Golf Course Extension, Sector 67,
Gurgaon, Haryana - 122102
F2, Sector F, HIG Colony, Indore, Madhya Pradesh 452012
ADDICTIVE LEARNING TECHNOLOGY LIMITEDCIN: L74110HR2017PLC118029
GST: 06AAQCA0212K1ZV
LawSikho, Space Creattors Heights, 3rd floor,
Landmark Cyber Park, Golf Course Extension, Sector 67,
Gurgaon, Haryana - 122102 We are social