ESOPs were traditionally used to reward senior employees and recognize their significant contributions to the company. However, because startups can't afford to pay hefty salaries in the early stages, ESOPs are now used as a compensation and incentive tool. Employee stock options have exploded in popularity in India in recent years, thanks to the country's thriving startup scene.
Employees at Infosys, one of the first firms to provide ESOPs, have become billionaires as a result of their contributions. Google recently hired an Indian with a package worth 1.2 crore per year, half of which was in the form of ESOPs.
What are Employees Stock Options Plan (ESOPs)?
Employee Stock Option Plans are plans in which employees are given the option to purchase a set number of shares (determined by the employer) in the firm at a reduced price in place of a salary (less than the market price). The employee has a right, but not an obligation, to use the option given under this scheme.
Employees must wait a set amount of time – known as the vesting period – before exercising their right to purchase a particular number of shares. Employees can exercise their options to obtain shares after they have vested by paying the pre-determined exercise price.
ESOPs are typically given to employees based on their performance or length of service with the company. As a result, it serves a dual role for the corporation and its personnel.
1. It serves as a motivator for employees since once they own a stock, they feel responsible for the company's performance because it determines the value of the company's stocks.
2. It assists the employer in retaining the firm and ensuring a high level of work performance.
The process of Employee Stock Options Plan
Compilation of a List of ESOP-Eligible Employees
This is the first and most important step in the ESOP system. Employees should be carefully chosen for participation in the ESOP plan based on their expertise, positions, and responsibilities, among other factors.
It is the most crucial phase for businesses. The following are important considerations to make while creating an ESOP policy:
- ESOP pool quantum.
- Employees' criteria for selection and evaluation in the plan
- Shareholder rights such as Tag along, Drag along, and pre-emption rights
- Option holders' rights
Approval by the Board of Directors
The next stage is to call a Board Meeting for final board approval after preparing a list of eligible employees, calculating the number of options, and developing an ESOP scheme. The board must approve the list of employees participating in the plan, the draught ESOP plan, and the notice of general meeting for shareholder approval.
A General Meeting of the Company's Members will be called to approve the ESOP scheme by Special Resolution. However, for a private limited company to issue an ESOP, only an ordinary resolution is required.
All companies (excluding private limited companies) must complete E-form MGT-14 and attach the Special Resolution for Scheme Approval, Explanatory Statement, Notice of GM, and approved ESOP policy.
Grant Letter Preparation and Distribution
Following shareholder approval, the company must send a Grant Letter to all qualified shareholders detailing their entitlement, vesting schedule, date of vesting, last date for exercising options, exercise price, manner of exercising options, and other terms and conditions.
Employee Stock Ownership Plans (ESOPs) Vesting
Between the time of option award and the time of option vesting, there must be a minimum of one year. For instance, if you issue the option on April 1, 2019, it cannot be exercised until April 1, 2020.
Employee Stock Ownership Plans (ESOPs)
Employees can apply for shares after the vesting period has ended, or they can wait until the last day to exercise or not apply for shares. Employees have the right but not the duty to purchase shares through an ESOP.
If shareholders apply for shares, corporations must allot the shares and file e-form PAS-3 for share allotment, which must include a Special or Ordinary Resolution for ESOP approval, a Resolution for share allotment, a list of allottees, and other documents.
Obtain a Share Certificate and Pay Stamp Duty
Within 30 days of allotment, the company must issue share certificates to the shareholders. On the issue of shares, companies must pay stamp duty based on the current stamp rates in the state.
ESOPs are a great way for businesses to attract and retain talent, but they're also a risky proposition for employees. Employees should be convinced of the company's future growth, and suitable documentation should be in place.
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