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Employee Stock Option Plan

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Employee Stock Option Plan (ESOP) is a program implemented by companies to allow employees to participate in company ownership by offering them equity shares at a predetermined price, in accordance with relevant laws and regulations. It serves as a valuable benefit for employees, enabling them to become partial owners of the company. ESOP also acts as a crucial tool for attracting and retaining talent within the organization.

In today's business landscape, ESOP, particularly in startups, is gaining considerable traction. Startups, being in their early stages, often opt for ESOPs to retain talented employees. This approach helps alleviate the financial burden of offering high salaries while providing motivated benefit plans that reward employees for their contributions to the company's success.

Various employee compensation plans, including Employee Stock Purchase Schemes (ESPS), Employee Stock Ownership Plans, and Employee Stock Options Scheme (ESOS), are widely adopted by corporations in India.

EQTBloom stands out as a leading advisory service specializing in ESOPs, equity, and ESOP taxation planning. Based in Noida, Delhi, Gurgaon, and other regions across India, we offer comprehensive consultation services.

ESOP Benefits for Employees

Acquiring equity shares enables employees to share in the company's ownership, connecting their success with that of the organization over time.

Generally, shares are provided at a fixed price, enabling employees to potentially profit from selling them at a later date.

These schemes serve as strong motivators, inspiring employees to excel and grow alongside the company.

Employees enjoy tax-free contributions to ESOPs, offering them added financial advantages.

For the Company

Bolsters employee morale, driving higher performance in their day-to-day duties.

Heightens employee retention, leading to decreased turnover rates.

Decreases director remuneration expenses for private limited companies by integrating ESOPs into the salary structure.

Key Considerations for companies

ESOP Pool Provision

Typically, ESOP schemes target specific employees based on their skills and contributions. Determining the maximum number of equity shares available for granting options requires careful consideration and may involve amending the company's Memorandum and Articles of Association to allocate a specific percentage of equity, such as 5% or 10%.

Share Capital Table & Shareholding Structure

Understanding the current capital structure and shareholding distribution among shareholders is essential to assess the available pool and plan the capital structure post-ESOP implementation.

Eligibility Criteria for Employees

Defining eligibility criteria based on factors like years of experience, technical expertise, and performance records ensures clarity on which employees qualify for ESOP participation.

Vesting Period or Term

Establishing the timeframe during which options gradually vest for employees is crucial. According to regulations, a minimum period of one year must elapse between the grant of options and their vesting/exercise.

Lock-in Period

Determining the duration during which employees are restricted from selling, transferring, or disposing of allotted shares is important to safeguard company interests.

Cancellation Provision

Defining circumstances, such as termination or misconduct, under which shares issued through ESOPs may be canceled by the company mitigates risks and protects company interests.

Exercise Price

Specifying the predetermined price at which employees can purchase shares at a future date provides clarity and fairness in the ESOP scheme.

Tax Liability Terms: Clearly outlining tax liabilities, including costs, expenses, and responsibilities for tax payments under applicable laws, ensures transparency for both employees and the company.

Procedure and Compliance

The formulation of ESOPs in India is governed by a legal framework consisting of:

a) The Companies Act, 201
b) The Companies (Share Capital and Debentures) Rules, 2014
c) SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
d) SEBI (Share Based Employee Benefits) Regulations, 2014

Implementing an ESOP scheme in India involves adhering to a structured process and complying with specific regulations:

Formulation of the ESOP Scheme: Drafting the ESOP scheme involves aligning it with company objectives and considering essential factors like the issuance quantum, offers to selected employees, and share pricing.
Shareholders' Approval: The ESOP Policy/Scheme necessitates approval from shareholders at a meeting. Previously requiring a special resolution, private limited companies now only need to pass an ordinary resolution.
Granting Options to Employees: Following shareholder approval, employees receive a 'Letter of Grant,' detailing key aspects such as granted options, vesting periods, and exercise price calculations. Valuation of shares by a registered valuer is mandatory for each option grant and exercise.
Employee Exercise: Employees can exercise their ESOP options by submitting an 'Exercise Application.' Upon receipt, the company must convene a board meeting to issue shares to employees in accordance with company laws and regulations. Furthermore, ESOP share issuances must be disclosed in the Board's Report, and a register must be maintained at the registered office, duly authorized by the Board.