How to Give ESOP to Employees

How to Give ESOP to Employees

For a start-up company to do well in the market, the employees play a big role in pushing the company further into the market. Employee Stock Option Plans (ESOPs) have lately been used as a strategy to attract and retain talented and skilled employees who would be rewarded for their efforts and contribution to the growth of the company. 

ESOPs were initially used for incentivizing the members of the senior management as a reward for their long-standing contribution, but, with the growth of start-ups in recent years, ESOPs have been used as a strategy to motivate and create a sense of ownership for the employees to boost their productivity as there is a tendency for start-ups to lose human capital at the initial stages. 

Before that, let us see how to give ESOP to employees

The steps to issuing ESOPs:

  1. First of all, in the procedure of giving ESOP to employees, the ESOP scheme needs to be prepared by a professional which covers various legal clauses like ESOP administration, grants, vesting, employee cessation, etc. 
  2. After the scheme has been prepared, it needs to get approval through a shareholders meeting of a special resolution known as EGM, the notice of which needs to be sent. After the notice has been sent, EGM is conducted, and the resolution is passed wherein the votes in favor of the resolution need to be three times the votes against. 
  3. The EGM and the board resolutions need to be filed with the ROC (Registrar of Companies) website, which is the work of the secretary as there is no other filing needed with the registrar as the ESOP is only an option and not shares, and thus, does not require increased authorized share. 
  4. After the above procedures are complete, the employees can be granted the ESOPs through a grant letter where the date of the grant letter needs to be greater than the resolution of the shareholder date. 

How do you give ESOP to employees?

After the steps to create ESOPs have been completed, the grant is then passed to the employees, and the procedure of giving ESOP to employees begins through the three processes known as Grant, Vesting, and Exercise. 

Grant

The first step in the process of issuing ESOP to employees is through the grant letter. The eligible employees receive the grant on the grant date, which is the date when the equity-based award to the employee, which basically means the date when an employer and an employee agree upon the terms and conditions of the grant. 

Vesting

After the grant has been given to the recipient and has been agreed upon, the next step is vesting, wherein the option holder receives the right to apply for the shares of the company in accordance with the terms and conditions mentioned in the employee stock option scheme. The vesting period is the ownership period for the employee that is eligible for exercising the option. The period of vesting is the grant date till the date the option becomes a vested option and can also be based on the milestone or performance of the grant holder. 

Exercise

The last step in the process of 'how to give ESOP to employees' is Exercise which takes place after the vesting period is over, which can also mean the milestone has been achieved or the required performance was seen. The option is given to the employee to be exercised, and the date on which the employee decides to exercise the option is called the exercise date. After the employee decides to exercise the option, the employee is allotted the shares from the employer according to the terms and conditions mentioned in the scheme. 

Apart from the steps of issuing the ESOP and the procedures of the ESOP that have been granted, vested, and exercised, there are few things that are taken into consideration while the ESOP is being issued and processed. There is a requirement of legal documents before the company, and the employee goes ahead with the plan of issuing and receiving the ESOP. 

The list of legal documents required are:

  1. Employee Agreement – it refers to the agreement of the board having the right to grant the stock option to the employees as it sees fit to do so. 
  2. ESOP Plan – this plan lists the terms, conditions, and all the features of the scheme. 
  3. Trust Deed – this deed is present only if a trust has administered the scheme. The trust deed is required as a means to create a trust to hold the shares. 
  4. Letter of Grant – the employees receive a letter in which the options have been furnished by the company's board of directors, post which the employees need to provide a letter of acceptance. 

Conclusion

The process of how to give ESOP to employees requires procedures before finalizing the scheme. A few things need to be kept in mind for the employees before accepting the ESOP scheme, like understanding the terms such as the vesting period, strike price, Cliff period, etc. And also, the scope of a start-up, the uniqueness of the idea, tax implications, and many other aspects of the scheme that the employees need to consider. While issuing the scheme, the company also needs to take consultations so as to know all the terms and conditions of the scheme that need to be followed from both ends. These steps are the guide to 'How to give ESOP to employees'.

For more information on Especia and to know detailed steps of 'how to give ESOP to employees, click here

If you are looking for any Employee stock option plan ESOP services or consultants in Noida, Delhi, Gurgaon or anywhere in India, write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114

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