According to recent statistics, start-ups are growing rapidly at a 10-12 percent annual growth rate in India. It requires smart resource planning, from obtaining the necessary assets and tools to assembling a strong workforce. The tremendous competition in the start-up world makes acquiring and retaining staff is critical. Employee Stock Options and Employee Stock Options Plan are one types of compensation that businesses give these days (ESOP).
It is an option provided to Company employees to purchase Company shares at a predetermined price; thus, it is an option concerning Company stocks but not a mandatory obligation for employees to whom such offer has been made; and another significant aspect is that said offer is made at a predetermined price.
The provisions of Companies Act, 2013, Section 62(1)(b) and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 (the Rules) govern the issue of Shares to Employee under ESOP. The Rules outline the conditions, procedure, and manner of issuing Shares to employees under ESOP. The provisions of the Act and the Rules thereunder provide only a basic framework for issuing Shares under an ESOP; therefore, the terms and conditions of the employee stock offer scheme and the eligibility criteria of employees are decided by the board of directors.
The right to purchase the company's stock at a future date at a price lower than the anticipated market rate After paying the option price, the option is converted into a share on any future date. Employees in a start-up wish to have a portion of their salary withheld from the share price. The terms and conditions for that purpose will be included in the ESOP agreement.
Key Points to understand for ESOP Agreement
Read the ESOP agreement carefully and keep an eye out for conditions such as extending ownership after a long employment time and reclaiming partial ownership after the minimum vesting period expires.
Company employees can use their position to negotiate a lower exercise price and faster settlement.
It is always suggested that the ESOP be exercised by setting an expiry date reminder.
Discussing agreement provisions with your financial planner before enabling or selling ESOP shares is preferable.
There are majorly three stages to process ESOP, which are as follows
Grant
Vesting
Exercising
GRANT is the first stage.
Eligible employees are given stock options on the grant date.
VESTING is the second stage.
The option holder is granted the opportunity to apply for company shares following the rules outlined in the employee stock option program. The vesting period is defined as the time between the date of grant and the day when the option becomes vested, i.e., when the option holder is eligible to exercise the option. Time, milestones, or performance can determine to vest.
EXERCISE is the third and last stage.
The employee has the right to exercise an option once it has vested, which means that the relevant vesting period has ended (or a milestone has been met). The exercise date is when the employee exercises their options. When the employee exercises their option, the corporation allows them to share.
According to the Companies Amendment Rules 2020 of the Ministry of Corporate Affairs, any companies that qualify as start-ups under the Department for Promotion of Industry and Trade's 2019 policy would be eligible.
The government has authorized start-ups to grant their employees stock options or employee stock ownership plans (ESOPs) for up to ten years from their registration year. Previously, the restriction for issuing these shares was five years. The decision is a welcome change in the times of Covid-19, when disrupted businesses of most start-ups have caused a liquidity bottleneck in the market, resulting in repeated layoffs, pay cuts, and laying off employees.
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