Things you need to know about ESOPs

What You Need To Know About ESOPs

ESOPs stands for Employee Stock Option Plan. Issuing of ESOPs helps in attracting and retaining top talent.

Nowadays, companies and startups have found ESOPs to be an attractive means of joining a company. ESOPs act as an insentive for employees, especially if the company can’t afford very high compensation packages immediately but they also encourage a feeling of ownership in the employee. Below are a few questions that would solve all queries regarding ESOPs.

Why Should A Company Offer ESOPs?

ESOPs are offered by the company to retain talent. Hence, can be offered to following to make them stay longer in the company:

  • Promoters – take care of dilution (in case the startup is registered under Startup India)
  • Current Employees – to reward them for serving the company for the time period.
  • Future Employees – as an incentive for joining the company. Offers can be made at the time of hiring.

To Whom Can A Company Offer ESOPs?

ESOP can only be offered to full time employees of the company.

Who Should Be Covered Under The ESOPs Schemes?

ESOPs are offered to retain talent hence who should be offered ESOPs and who shouldn’t would be decided by top management of the company.

Generally, those employees who understand equity accept ESOPs.

How Much ESOPs Should Be Given To An Employee?

The number given shouldn’t be too less that the person simply ignores nor a lot such that it confuses the receiver.

The number given should be attractive enough that the person feels satisfied.

At What Price You Should Offer ESOPs To An Employee?

Generally ESOPs should be offered at a discounted price nearly 20%-30% than the market price of the share.

For example – if the market value of the share is INR100/- then it should be provided at INR80/- or INR70/-.

What Would Be The Vesting Period?

The minimum vesting period would be 1 year from the date of issue. However vesting periods tend to be between 12 months and 3 years, depending on the structure of the scheme.

Is It Mandatory To Form An ESOP Trust To Offer ESOPs To Employees?

It would be the decision of the company whether they want to form a trust for maintaining ESOPs or not.

Generally, trust is required for ESOPs when a company is operating on a large scale.

Conclusion:

If you’re going to issue ESOPs for first time then sure it will be confusing but I hope that our blog What you need to know about ESOPs would have given your some insights on the same, comment your views or questions if you have any.

However if you’re still not able to decide whether you should issue ESOPs or not or you want to know anything regarding ESOP setup then feel free to contact us anytime at info@bbnc.in Thank you for reading, we’re always happy to be able to provide useful information on topics like this!

 

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