Stock Option Plans are right and not obligations for the employees to purchase a certain amount of shares at a fixed rate from the company's stock at a certain period of time, for which the company needs to go through several procedures. Stock options plans for startups have recently been used as a retention strategy for skilled employees to boost the growth of the company. It is common that startups tend to lose human capital in the early stage. The stock option plans are a convenient way to profit for both the company and the people working for the company and are rewarded after a certain investment. Stock Option Plans are thus called Employee Stock Option Plans and are a mechanism for rewarding employees for contributing to the growth of the company.
There are various reasons why stock options plans for startups are a preferred scheme.
During the vesting period, the company gets enough time to gain financial stability as they can substitute the cash benefits with the grant of ESOP, and so they do not need to spend at the time of granting. As startups do not have much cash inflow, the stock option plans for startups help them gain financial stability during this vesting period, and they need to spend much less on the employee.
The attraction of skilled and work-oriented employees
With the rate of increase in startups and their success rate, the young generation is willing to invest their time and productivity into those startups. The stock option plans for startups can be a great way to keep the employees working for a longer duration to get rewards at the end alongside attracting skilled workers who would want to invest in the company. This way, the startup will have enough human capital to work for the company as well as provide them with an option to invest in the shares of the company.
Employee retention strategy
After the employees are granted the scheme, the vesting period starts, during which the employees are unlikely to leave the company. During this period, the employees cannot exercise the options, which makes it a bad choice to leave the company as the scheme will be terminated. This vesting period gives the company the chance to have the required human capital, and a good ESOP scheme can even make the skilled employees stay longer.
Means of motivation
Soon after the vesting period is over, employees exercise the options which give them a sense of ownership of the company. This motivates the employees (shareholders) to work harder as it will be parallel to the profit of the company, which will, in turn, increase their productivity. Therefore, stock option plans for startups are a great way to increase the employees' productivity as their work contributes to their profit by increasing the share price, thus, increasing their rewards as well through the share price.
Provides security to the employees
Usually, the ESOP scheme is provided to employees who have a greater contribution to the growth and recognition of the company, which can be a challenge for startups as they are not well-recognized in the market field. In such cases, the employees tend to doubt their position in the company they are working for. Thus, the scheme gives the employees some security because of which they do not need to look for their next job options.
Now that we have seen the benefits of opting for the Stock Option Plans for startups, there are things to consider before taking up the scheme and certain procedures that need to be followed for legalities.
The steps to issue Stock Option Plans for Startups are as follows:
- The ESOP scheme is first drafted, which requires approval in a Board Meeting.
- The scheme is then convened in the general meeting for approval of the shareholders, the notice of which needs to be attached with certain particulars like the total number of stock options that will be provided, information on the class of the eligible employees, vesting period, exercise price and period, method of valuation of options, a statement of the company to comply with the accounting standards, etc.
- The scheme then is approved by passing a special resolution. A separate approval needs to be passed if options are granted to a subsidiary or holding company or grant of the options during a one-year period which is equal to or more than 1 percent of the issued capital at the time of granting.
- The MGT-14 needs to be filled within 30 days of submission of the resolution and then granted the options to the eligible employees for their approval.
- Vesting period of 1-year minimum before the employees exercise the options and are then allotted the shares followed by maintenance of a Register of ESOP.
The above-mentioned steps are important for issuing ESOP schemes by the startups in order to get started.
A stock Option Plan for startups is meant to profit the company and act as a reward for the work and dedication of the employees. Stock Option Plan for startups has become a popular practice lately, which was mostly opted by companies that have already earned a position in the market and was a way to provide security to the senior management team. Before opting for such schemes, consultation is necessary to be fully aware of whether the company needs to opt for the scheme or not.
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