An employee stock options plan is an employee benefit scheme to provide them an ownership interest in the corporation. The Company’s board of management administers the ESOP process and lays down specific rules regarding the same.
A part of the total equity amount is set aside to offer this benefit to the key employees of the organization. The offer price is decided by the board of directors in advance and it remains very close to the fair market value.
The structure of ESOP is generally governed by the company’s financial needs, health, and objectives. Different issues have to be accounted for before making the final decision of setting up an ESOP.
Here is a step-by-step guide to set it up for your employees.
These rules set forth the terms that apply to all options granted under the plan, including the granting options process, when and how employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves the organization.
An efficiently drafted ESOP Agreement helps in structuring the ESOP by creating an Employee Stock Option Pool (ESOP Pool) that helps in placing an equity shareholding percentage on the side for employees.
Hence, employees can participate in the company shares because of this pool. Further, an ESOP Agreement will clarify the details of members of an ESOP committee. The ESOP committee is a committee that comprises the company’s directors and other officers.
The responsibility of managing the ESOP Pool lies with the ESOP committee and it recommends suitable actions to the Board of Directors of the company.
Once your set ESOP rules are completely satisfactory, your directors and shareholders can sign the corporate approval documents for adopting the ESOP rules and successfully setting up the option pool.
For Singapore companies, these resolutions will be practically handled by your corporate secretary. If your company is not Singapore based, you should be confirming this step with a local law firm.
Your corporate secretary will prepare a set of directors’ resolutions in writing for your company’s directors to sign and a similar set of written shareholders’ resolutions for your existing shareholders to sign. The following points should be included in the resolutions:
- ESOP rules approval
- The total number of ESOP pool options.
- Authorization for the board on granting options to recipients
- Authorization for issuing shares on any exercise of such options
The company’s constitution and your shareholders’ agreement may include precautionary rights on the issue of new shares.
If this is the case then those shareholders having the precautionary rights will have to sign a waiver in respect of any options granted under the ESOP. If required, you should ask your corporate secretary for preparing this shareholders’ waiver also.
Finally, your existing constitution and shareholders’ agreement should also be checked for specific consents required from any shareholder for issuing shares, grant options, or establishing an ESOP. For instance, if you have gone through external funding round, your investor might have a veto right over the issue of any new options. If that is the case then you will need that party’s written consent for granting options and issuing shares under the ESOP.
Here’s what you need to do for granting options to the selected recipients.
- Prepare your directors’ resolutions
Every time you feel like granting options, you should ask your corporate secretary for preparing a new set of directors’ resolutions in writing, approving the grant of options to a specific or a list of recipients.
- Send grant letter to each recipient
Send each recipient:
- A completed & signed grant letter including the number of options granted, the exercise price along with the vesting schedule.
- An attached copy of the ESOP rules.
If the recipient is willing to accept the offer then they should counter-sign the letter of grant and send it back to you.
- Issuing the option certificate
After receiving the countersigned letter, you are allowed to issue them their option certificate.
- Updating your options register
Internally, you should also maintain an options register, containing the record of all the options the company has granted, the vesting schedules, expiry dates, and the respective exercise dates.
Despite numerous advantages, many critical factors should be considered while implementing ESOP in any organization.
Initially setting up an ESOP is a flexible process but is also very complex. Some many rules and regulations are to be followed in every aspect and considering many different scenarios are extremely crucial. The process of setting up an ESOP is quite costly and should necessarily involve a practicing lawyer.
No rule tells how big your ESOP Pool should be. However, experts recommend that companies should set a limit on the amount of equity they are willing to share with their employees. This task can be time-consuming as various trends are to be studied in the process.
The ESOP agreement should contain a transparent provision for the happenings when any employee who holds an ESOP decides to leave the company. Generally, an outgoing employee takes back all his unvested options but retains the vested options until a specified period.
Setting up an ESOP is not a very difficult task once you have a set of ESOP rules that are satisfying for you. In most cases, your company secretaries are efficient enough to be able to prepare all the necessary resolutions quite efficiently. You just need to finalize on what is best for your employee’s interest and how you can safeguard this interest in the long-run. Any foolish decision of even a small scale can lead you towards a dangerous future.