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Employee Stock Option Plan (ESOP) is an employee benefit plan that allows employees to become owners of stock in the company they work for. ESOP is a common practice among Startups these days to reward performing employees by giving ESOPs as a part of the salary. ESOP plays vital role to retain employees at the growing stage of the company.
Let’s read in details more about ESOP:
Question 1. What is Employee Stock Option Plan (ESOP) and its main objective?
Answer: Employees stock option means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives them a right to purchase the shares of the company at a future date at a pre-determined price.
The main objective of issuing ESOP is to:
a) Motivate the employees to contribute to the growth and profitability of the company.
b) Control costs and minimize the risk for business
c) Retain the talented employees
Question 2. What is Employee Stock Option Scheme?
Answer: The ESOP Scheme/plan/policy is a documents which governs the rules for issuance of stock to employees under the scheme. The Employee Stock Option Plan or ESOP Scheme acts as a main contract between the organisation and the employee. ESOP Scheme contains the terms on the basis of which stock will be issued to an employee. Thus, if an employee opts for ESOP then they have to adhere to the terms and conditions mentioned in the ESOP Scheme adopted by the organisation. Essential clauses that an ESOP Scheme must have:
a) Objectives of the ESOP scheme
b) Term of the scheme
c) Definitions
d) Equity shares subject to the ESOP scheme
e) Eligibility criteria
f) Grant of options
g) Vesting of options
h) Option exercising plan and consideration
i) Methodology of exercise of option
j) Rights of an employee who owns the shares of the company under ESOP scheme
k) Amendment and Termination of the ESOP scheme
l) Dispute resolution mechanism and jurisdiction
Question 3. What are the important terms used while issuing ESOP?
Answer: Five terms have to be looked at by the companies while considering the issue of ESOPs:
a) Option: Option is a right but not an obligation. A right to purchase the shares of the Company. An option in ESOP gives the employee a choice to purchase the shares of the company on the fulfillment of the conditions mentioned in the ESOP plan at the price decided at the time of grant of options.
b) Grant: Grant of Options means the commitment that an employer makes by informing the employee of the eligibility of the available options.
c) Vesting: Vesting of options is the stage where employee becomes eligible to the right to apply for the shares granted to him. It is the entitlement of the option to an employee. Prior to exercise of the option, the employee has to wait for a limited period as a condition of ESOP grant.
Vesting has two components – Vesting percentage and vesting period. Vesting period is the period on the completion of which the said portion can be exercised. Vesting percentage refers to that portion of total options granted, which the employee will be eligible to exercise.
d) Exercise: Exercise of options is the stage where employee owns the vested shares after payment of pre-determined price (exercise price) to the organisation. The companies have freedom to determine the exercise price in conformity with the applicable accounting policies, if any.
e) Effective Date: The effective date of exercise is the date on which the Company allots the shares.
Question 4. Employees to whom ESOPs may be issued?
Answer: For the purposes of Section 62(1) (b) read with this rule 12 of The Companies (Share Capital and Debentures) Rules, 2014 ‘‘Employee’’ means-
(a) A permanent employee of the company who has been working in India or outside India; or
(b) A director of the company, whether a whole time director or not but excluding an independent director; or
(c) An employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company.
But does not include-
(i) An employee who is a promoter or a person belonging to the promoter group; or
(ii) A director who either himself or through his relative or through any Body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
Relaxation to Startups: As per the notification issued by the Department for Promotion of industry and Internal Trade and Ministry of Commerce and Industry, Government of India, the conditions mentioned in sub-clause (i) and (ii) shall not apply to Startup Companies up to ten years from the date of its incorporation or registration.
Question 5. Who can Exercise the ESOPs?
Answer: ESOPs can be exercised by an employee in the manner mentioned below:
a) No person other than the employees to whom the option is granted shall be entitled to exercise the option.
b) In the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
c) In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.
d) In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.
e) The option granted to employees shall not be transferable to any other person.
f) The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
Conclusion: Since many companies have now made ESOPs as part of the compensation for key employees. ESOPs are beneficial to both employees as well as Startups if implemented effectively. The sense of ownership acts as a motivation for the employees to work hard and diligently. There is a subtle sense of pride that employees may feel when an organisation make them a part of business success. ESOPs are beneficial to both employees as well as Startups if implemented effectively.
Article by: Ms Bhavya Sharma, a Practising Company Secretary from Delhi.
You can contact us at: legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com
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