ESOP Decoded

Employee Stock Ownership Plan (ESOP) Decoded

I attended a session organized by The Talent Deck on Employee stock ownership plan (ESOP). The session was moderated by Mohammed Sufiyan Sait and Ankita Tandon to simplify ESOP. I am sharing below the learnings and key take aways from the session for LinkedIn family. This will be helpful tool for the experienced professionals, college grads joining startups, enterprises /corporates.

What is ESOP?

ESOP stands for Employee Stock Ownership Plan. When the organization extends you ESOP it is a clear indicator of the trust that they want to exhibit in you. The organization want you to work and think like co-owners to drive long term success, mission and vision.

Who is governing ESOP?

Companies listed (Limited companies) on Indian stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), need to adhere to the listing agreement and disclosure requirements related to ESOPs. Stock exchanges often have their guidelines and formats for reporting ESOP-related information.

Companies (starts ups / Private Ltd) not listed are governed by Ministry of Corporate Affairs (MCA),is responsible for regulating corporate affairs and corporate governance in India. It plays a significant role in governing ESOPs. MCA regulations govern the issuance and administration of ESOPs, and they require companies to adhere to specific reporting and disclosure requirements.

How and Why of ESOP?

1.???? VC firms encourage startups to establish an Option Pool before raising the investment round.?An Option Pool represents a pool of shares for future employee grants. With a pre-existing Option Pool, startups can allocate shares to employees, making the company more attractive to top talent.

2.???? ESOPs can be granted to employees of the organization however the same cannot be extended to consultant/intern.

3.???? A policy document is created and shared with the employee that holds all the information regarding the value of the Units assigned.

4.???? ESOP Lifecycle in a non listed company/organization.

ESOP Stages (Grant ?----à Vesting ?---à Shares)

ESOP’s are granted to an employee under different circumstances a) at the time of hiring, b) as a token of appreciation for good performance, c) during appraisals or as a retention tool. Employee should check the value of Units Granted, the Vesting schedule, exercise Window explained in the Grant Letter / ESOP policy. ESOP policy can / may change but the same has to be communicated to the employees proactively.

Vesting Schedule has minimum lock-in period or also known as cliff period. Cliff Period is typically 1 year in general, till the defined period is complete ESOPs will not get vested.

To simplify this more, ESOP’s is a seed that is seeded in the pot and will grow into a plant that will reap fruits. Therefore we need to have the patience to nurture the plant that in turn will yield results.

It is important for organizations to communicate the vision, mission, policies to their employees clearly. That will define the way employees invest themselves in the organization and find true meaning of co-ownership.

There is much more to ESOP and will be writing a follow up article soon.

Cheers

Umang

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