Being the younglings of the corporate world, most start-ups lack the experience to manage their capital and ultimately encounter cash problems. Start-ups are prone to losing workforce as many times they lack the resources to provide lucrative investment offers to motivate and retain their employees. One provision for a start-up to solve this problem is Employee Stock Options Plan (ESOPs) that not only help companies in retaining employees but also in maintaining capital liquidity. A well-drafted ESOP can motivate employees by creating a sense of ownership in the company.
ESOP is an offer to employees of a business that allows them to buy company’s stocks at a certain price. The objective of an ESOP is to encourage organic employee participation in affairs of the organisation. The price on which the stocks are offered to employees can be of 3 kinds:
a) Market price i.e. the current price at which the stocks of the company are listed on the stock exchange,
b) Preferential price that is lower than the market price offered exclusively to the employees, or
c) the management may fix the price at whatsoever it pleases if the company is not yet listed on the stock exchange.
These are governed by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
ESOP holds great importance for the following reasons:
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A start-up needs funds, hence the capital requirement of the company can be fuelled by offering stocks of the company to employees, keeping them within the organisation.
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ESOP proves to be a great alternative for attracting, retaining and motivating employees instead.
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It is like a profit-sharing plan. Employees knowing that they are shareholders and owners are bound to work with more enthusiasm and feel personally liable for the growth of the company.
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Given the limited marketability, it is better to utilise this scheme rather than listing shares on a stock exchange.
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A start-up needs funds, hence the capital requirement of the company can be fuelled by offering stocks of the company to employees, keeping them within the organisation.
-
ESOP proves to be a great alternative for attracting, retaining and motivating employees instead.
-
It is like a profit-sharing plan. Employees knowing that they are shareholders and owners are bound to work with more enthusiasm and feel personally liable for the growth of the company.
-
Given the limited marketability, it is better to utilise this scheme rather than listing shares on a stock exchange.
However, the start-up requires being wary of risk involved with regards to dilution of the business. Excessive allotment of company’s shares must be avoided to protect the business.
Keeping in mind the importance of a well-designed ESOP, here’s a complete guide to the key features of drafting and implementing an all-rounder ESOP:
STEP 1: Draft the ESOP
While drafting an ESOP, there are certain things that must be kept in mind while drafting the scheme. there are a few questions that must be clearly answered in the form of clauses of the scheme in the Employee Stock Option Plan. These clauses include:
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Name of the plan
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Purpose of the plan
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Eligibility of employees
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Share Limit
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Letter of Grant
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Exercise price
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Nomination
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Term of the Plan
STEP 2: Set up an ESOP Committee
The ESOP Committee functions as another department, appointed by the board of directors and performs the activities of day-to-day execution of the plan. The committee has the power to set up meetings, external events, conferences, etc. It takes decisions regarding plan design and amendments as well as directs the trustees on decisions such as the voting share.
STEP 3: Issue Subscriptions
The final step is to issue subscriptions to employees who wish to invest in the company. The most important feature of an ESOP is that it provides employees of the company the option to purchase its shares, which keeps those shares in the organisation itself. It creates a sense of trust and responsibility between the business and its employees by giving them a small part of company’s ownership.
Employee Stock Options Plan is a method of striking a chord with the start-up’s employees. By offering them company’s equity shares or stock option, the company has the option of making its work-talent to stay in the company for a longer period. An ESOP that maintains the balance between the company’s interest by providing capital liquidity and employees’ interest by giving them the right to exercise the share subscription in future.
