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One of the critical keys to a successful business is aligning the interests of the employer with the interests of the employees. Though it is challenging, but, the greatest asset of a company is its people. Without a competent and motivated team, a venture is unlikely to succeed no matter how great an idea or business concept is involved.
One way to align the interests of the employees with the employer is to create a culture of ownership. Many start-up enterprises have limited capital and need to conserve their capital spending until they become cash-flow positive from operations. Accordingly, most start-ups are not able to pay wages that are equivalent to large, legacy companies. Hence, when a Start-up is enabled to compensate the employees what option they have? The Answer is Stocks!!!
By granting equity rights to the employees, the employees are no longer just workers — they are also owners. When you are an owner, your work is not "just a job," and you are more willing to take on responsibility and take pride in your work-product. Stock options benefit both employees and employers. Start-ups are now also deriving benefits from offering stock options. Businesses receive valuable benefits. But the question arises what kind of stock a start-up can offer to their employees so we have provided a few options a Company can adopt in order to compensate the employees through stock ownership.
Types of Stock Option Plans:
A. Employee Stock Option Scheme or ESOS: means a scheme under which a company grants employee stock options directly or through a trust to the employees. Such plans may be selective or all-employee plans.
B. Employee Stock Purchase Scheme or ESPS: means a scheme under which a company offers shares to employees, as a part of public issues or otherwise, or through a trust where the trust may undertake secondary acquisition for the purpose of the scheme.
C. Stock Appreciation Rights Scheme or SAR: means a right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the Company. SARs contemplate passing on of appreciation in the value of a certain number of equity shares to employees over a predetermined time period.
D. Sweat Equity: A company may issue sweat equity shares to its directors or employees at a discount or for consideration other than cash, for their providing know-how or making available rights in the nature of intellectual property rights or value additions. It is stock-based compensation to employees for their efforts and contribution to the company.
Conclusion: Nowadays, stock options are part of the packages offered by many companies. However, they have typically added perks and do not serve as a replacement for a competitive salary. Whereas during this time of pandemic it can be the most preferred option a company can opt for in order to retain the best talent. Having ownership in the company they work for can make them more “connected” to the business. Moreover, in the long run, this is beneficial for both employer and employees.
Article By: Ms Bhavya Sharma, a Practising Company Secretary from Delhi. In order to know more about the stock option plan and implementation process of the same, as suitable to your organisation you can connect with us. You can contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com
Disclaimer: Although due care and diligence have been taken in the preparation and uploading this Article, Bhavya Sharma & Associate shall not be responsible for any loss or damage, resulting from any action taken on the basis of the contents of this Article. Anyone wishing to act on the basis of the material contained herein should do so after cross-checking with the circulars, notifications, applicable acts, press release issued by the concerned department or seek appropriate counsel for their situation.
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