Understand what Employee Stock Options (ESOPs) are and why a company, especially startups, should implement them. Learn about the advantages and vesting schedules. For ESOP advisory, contact Saras Juris Law.
ESOP stands for Employee Stock Options.
It is a reward scheme that startups give out to selected employees, based on their position and ability to impact the company. Some of the key elements of ESOPs that
1. It enable employees to buy the company’s shares at a discounted price, which can grow in value over time
2. ESOPs are a way of attracting talented employees to a startup and make them part-owner of the company so that they can be retained for a long period of time and Start-ups can take benefit of the expertise of such employees.
- ESOPs are also meant to align incentives and work by giving employees a stake in the company’s success.
Advantage for Start-Up Company for Granting Employee
1. They can appeal and retain talented employees by offering them a sense of ownership and a share in the company’s growth.
2. They can control cash variables in the company by reducing the cash component of the compensation package and conserving cash flow.
- They can raise new equity, refinance unpaid debt, acquire assets and more by using ESOPs as a corporate finance strategy.
1. They can facilitate succession planning and ownership transition by allowing employees to buy shares of the company at a future date, however, very few companies are doing so.
Vesting Schedule
One of the important concept in ESOP Mechanism is the Vesting Schedule. A vesting schedule is a plan that determines how and when the employees can exercise their ESOPs or acquire the shares of the company. A vesting schedule usually specifies a vesting period, which is the minimum time an employee has to work for the company before becoming eligible to exercise the ESOPs or acquire the shares.
A vesting schedule may also include other conditions or criteria, such as performance goals, milestones, or events, that the employee or the company has to achieve before the ESOPs or shares are vested.
1. A vesting schedule can be either cliff or graded. A cliff vesting schedule means that the employee gets 100% of the ESOPs or shares after completing the entire vesting period.
2. A graded vesting schedule means that the employee gets a percentage of the ESOPs or shares at regular intervals during the vesting period until reaching 100%. For example, a four-year graded vesting schedule with 25% vesting each year means that the employee gets 25% of the ESOPs or shares after one year, 50% after two years, 75% after three years, and 100% after four years.
Minimum Cliff Period as per Companies Act, 2013 – 1 Year
In case of looking for ESOP Advisory, please feel free to reach out at info@sarasjurislaw.com.
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CS Kanchan Gupta, founder of Saras Juris Law and can be contacted at Info@sarasjurislaw.com or can access at www.sarasjurislaw.com ).
Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.
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