Employee Stock Option Plan [ESOP]

Employee Stock Option Plan

Companies introduce the ESOP scheme to offer company shares to their employees at a predetermined rate, thus encouraging ownership among them. This increases the chances of the employees staying with the organization longer and encourages them to work harder and more effectively to show loyalty to their company.

As the company’s valuation increases, the share value also keeps increasing.

Why should we use ESOP?

• It delivers fair value to shareholders and is a tax-favoured option.
• ESOP allows a low and slow ownership transition
• It benefits the employees and members that provide value to the company and stay longer.
• It assists companies in being independent and sustainable.
• It acts as a preserver of the company’s legacy.

Benefits of Employee Stock Option Plan

Attract Top Talent

Even if a company’s offer doesn’t match a talented candidate’s salary expectation, they might decide to join if the shares of the company are offered.

Build Motivation

Employees tend to perform well as they will earn more if the company performs well due to the ESOP scheme, and it acts as the best motivation.

Keep Them Longer

The vesting period of the shares is the minimum amount for which an ESOP employee stays in the company and even longer.

Requirements for ESOP

• Check the articles for any specific provisions regarding ESOP shares.
• A board meeting should include the compensation committee’s date and members.
• The number of ESOPs to be granted will be included in the notice of the general meeting.
• In the same way, hold an ordinary resolution meeting for shareholders to approve. In addition, the compensation committee should be formed, and the shares issued under ESOPs authorized.
• Compensatory committees (CCs) are required. An independent majority of the CC shall comprise the board of directors.
• Shareholders approved the separate resolution.
• Draft copies of certificates are required.
• Form-PAS-3 is filed.
• In the Director Report (DR), there is disclosure. At the registered office or any other place decided by the board of directors, the register of ESOP in SH-6 must be maintained.
• A CS or any other person authorized by the board must authenticate the entities in the register.

Eligibility criteria for ESOP

The statistics of an eligible candidate for ESOP are:-

• The maximum age of an employer that is eligible for an ESOP is 21
• Must be eligible for ESOP in the joining year
• An employer can restrict eligibility with two years of service if the plan is immediately vested.

How to structure an ESOP?

• Find out if other owners are amenable.
• A feasibility study is needed.
• The valuation must be conducted.
• An ESOP attorney must be hired.
• Sufficient funding is required.
• The process is decided when planning.

The process to register an ESOP.

Draft The ESOP Rules

The ESOP terms regarding options granted under the plan like – how the options are granted, at what time and how employees can exercise their options, and in case of an exit event, what happens to the options. The document will include the following schedules:

• Schedule 1: A grant letter must mention the terms and conditions.
• Schedule 2: If an exercise holder wants to exercise their vested options, then the form of the exercise notice is to be delivered to the company.
• Schedule 3: An option certificate is required, which contains the number of options, their exercise cost and vesting provisions

Then Approve The Rules 

Your directors and shareholders must sign some corporate approval documents to adopt the ESOP rules once you are satisfied with the options pool rules.

 Approval of the Board and Shareholder

These resolutions must be approved:

• The rules regarding the ESOP.
• The number of options in the ESOP.
• Authorization for the board to grant options to recipients of their choosing, and
• Authorization to issue shares on any exercise of the options.

Shareholder Waivers And Consent

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 to 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:

• Once you have received the letter, you can issue them their option certificate. You can find the option as the certificate form in schedule 3. Here the schedule should be left blank, and a separate option certificate should be provided to the recipient. That is, you need to create a fresh, separate word doc.

Update Your Register Option

Internally, you should also keep an option register, which records all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.

What are the Documents required for Employee Stock Option Plan?

• Copy of Minutes of a board meeting.
• The resolution proposed at the meeting approving ESOP and the explanatory statement.
• Minutes of the general meeting.
• Boards report.
• Register the employee’s stock option plan.
• PAS- 3, MGT- 14.

Frequently Asked Questions